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
Why is so much of India’s population excluded from access to formal credit and what can be done to address this issue? Rohit Sen argues that advances in data science, technology and the government’s new financial infrastructure will encourage the development of financial inclusion. A couple of weeks ago, my maid asked me for a loan. “What do you need the loan for?” I asked. “Sir, I took a loan last year, but the interest is very high. Each month my balance keeps going up and up. It is too much”. It turns out she went to a local money lender and is paying 5% per month, which is about 80% annualised. It’s easy to see how things can get out of hand. Sensibly, she wanted to borrow from me to pay off this high interest loan. It was the only way she could get her head back above water. She’s someone I trust, so I gave the loan. But let’s suppose I didn’t. What would she do then? I doubt she really had anyone else to turn to. Would she have to sell something precious to her? Would it just spiral out of control? In India today, a substantial amount of people are facing this situation. The security guard in my building has no access to formal credit. Nor do many working in the service sectors. Call centre staff? Workers in small and medium sized enterprises? No chance. Even most graduates can’t get a loan from a bank. In fact, access to credit in India is so restricted, that rather than ask who can’t get a loan, the more pertinent question is who can get a loan. The answer is that less than 10% of Indians have access to formal credit. That means there are at least 1 billion to people who can’t access formal credit in India. To be clear, I am not saying that all of them should be able to get credit, it’s merely an indication of the size of the problem. And in the same way water fills available space, in India there is a large informal lending economy to fill the gap. Why don’t Indian banks lend to such a large demographic of the population? Why are all the aforementioned people, who have jobs, denied credit? Are they all really that unsuitable as potential borrowers? The problem actually arises from two factors: first, most of the population has no formal borrowing history and thus no bureau (CIBIL) score and are consequently invisible to banks. Since banks don’t have enough information on the borrower, they ask for collateral, and that’s why most lending is secured. The trouble is, many people don’t have the luxury of having security they can pledge. Second, banks, due to their large branch network and employee base, have a heavy cost structure. Any loan disbursed needs to be of a certain size for it to be economical for them. There’s a reason why you can’t apply for a INR10,000 ($150) personal loan. Again, most people are not in a position where they can borrow and afford to repay a loan of INR1 lakh ($1,500) or more which further encourages the practice of informal money lending at high rates. The good news is that we are living in a time where three trends are coming together; their confluence creates a solution to this long-lasting problem of access to credit. Advances in data science, technology and the Indian government’s ‘India Stack’ infrastructure allow us to create products that the underbanked need and want, and a business that can have enough scale to address this challenge in a meaningful way. No longer do individuals need to be in invisible; by capturing some of their data from their digital and analogue footprint we can make an assessment of an applicant’s creditworthiness. By having an operationally light, fully digital infrastructure, not only can we provide the underbanked with products that are relevant to them, we can also provide a better experience as well. Incrementally, it is possible that hundreds of millions more Indians will be able to have access to credit through a formal system. Credit will be cheaper and easier to access and manage than the informal channels available to them today. Does it matter that people have or don’t have access to credit? Why can’t people just save up enough money before they buy whatever good or service they are seeking? Yes it does matter. A lot. Millions of Indians are constrained from pursuing their wants, needs or aspirations simply because they lack the capital to do so. They could do these things if they were able to spread payments over time, it’s not as if they don’t have income, but in a credit scarce world they are stuck. Think of the budding photographer that can’t pursue their passion, the millennial that is unable to take an educational course and better their prospects, or the family that can’t afford to pay the hospital fees for medical treatment in an emergency. Credit is not the answer to everything. It can lead to trouble. If managed responsibly however, it can help level the playing field in the good times, and provide a safety net in the event of a financial shock. It can give people the choice and economic freedom to do with their lives what they choose, or at the very least, fulfil important lifecycle events. This new form of digital underwriting is still in its nascent stage. Fintech players have barely scratched the surface into figuring out what sorts of alternative data have significance in explaining credit worthiness of a borrower. They haven’t faced a full credit cycle through which their models have really been put through their paces. There is a long way to go. Nevertheless, we do now have a roadmap towards financial inclusion. This will help people to save, invest, and improve their circumstances. An economically empowered population will of course be good for the bottom line of the national accounts, but it will also have a profound impact on a societal level too. A freer society is a richer society. Let’s hope that this can be realised. About the Author Rohit Sen is CEO and Co-founder of NIRA, a consumer credit fintech startup based in India. Previously, he worked as a structured credit trader in London for 12 years. Rohit completed his Bachelor’s at Oxford (2002) and his Masters degree at LSE (2003). He tweets @solar_corona 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.
The technology industry is indeed an eventful place. News of Artificial Intelligence, Machine Learning or Blockchain disruptions, a new startup entering the billion-dollar unicorn club or the drama of a Facebook acquiring WhatsApp one day and an Instagram on another swarms our screens regularly. As the industry grows by leaps and bounds and gains much from the fabled ‘network effect’, the rest of the world is struggling to catch up. The recent upheaval around Facebook’s alleged involvement with Cambridge Analytica, (the ad-data firm behind Trump’s 2016 election campaign which accessed sensitive information of millions of users without their consent), has once again brought the sector under severe scrutiny. The Tech industry is underway rapid transformation with varied and numerous “technology and services” companies primarily focused on development of software and hardware gradually evolving to fewer pure play “technology ecosystem-building” companies which create, apply and optimize digital technology to control massive consumer and business markets such as Google, Amazon and Facebook, giving them leverage over both producers and consumers. This rapid integration results in the creation of a Digital Oligarchy of sorts, where companies no longer compete to be the best hardware, software or service provider, but push to leverage the technology they own across markets and functions, like entertainment, education, retail et al. This is explicit in our daily lives wherein companies like Google and Facebook own most of what is on the internet and Amazon dominates much of the retail sector. These handful of companies, not surprisingly most of them American, dominate large parts of global markets and economy. Criticized for their pervasive and often intrusive presence, there has time and again been clarion calls to rein in these giants. With the exception of a few naysayers, most agree that there is a need to regulate the sector, laying down guidelines around pricing, data and privacy. Technology titans have recurrently come under the microscope for inappropriate use of customer information, breach of privacy or circulation of objectionable data. Of course, these companies enforce rigorous internal policies when a violation is reported. However, in most cases they adopt a passive approach instead of proactively anticipating contingencies. It is only after the recent uproar that Facebook is reviewing the nature, scale, and usage of information exchanged with third party applications and advertisers on its users. In a recent interview with CNN, Facebook CEO, Mark Zuckerberg lamented that upon learning of the issues, the company had asked Cambridge Analytica to certify that “they had none of the data from anyone from the Facebook community, that they deleted it if they had it, and that they weren’t using it”. The fact that the world’s largest social network took Cambridge Analytica’s assurance on face value indicates the chronic difference towards data misuse. Another major concern is that of tax-evasion. Most technology-based platforms, especially the ones built on a ‘sharing-economy’ model (one in which the owner rents out goods or services to be monetized on a peer-to-peer services platform), such as, Uber or Airbnb, bypass tax liabilities by claiming to be a plain tech-based “facilitator”. This becomes problematic when a ride-hailing company such as Uber gets away without facing any significant tax obligation, while black and yellow taxi services, much smaller in scale, are bogged down by similar considerations. In addition to this, since these companies are currently not bound by any regulations, the overhead compliance cost is reduced considerably, rendering them to be profitable ventures despite offering their services at lower prices. Once again, the traditional services industry, unable to compete, stands to lose. Google and Facebook have to a great extent monopolized digital advertising revenues. These bottomless platforms are designed to maximize the amount of time spent on these websites or applications. Facebook, for instance has replaced media websites and newspapers as a preferred source of news and information. Without any fact-checking mechanism in place, the platform is often used to propagate malicious or spiteful information. However, lately with governments across the world realizing the threat these giants pose to the functioning of a democratic and free global market, new measures are being taken to curtail their authority. The European Union, for instance, is set to put in effect the General Data Protection Regulation (GDPR), which shall mandate all EU members to adhere to a baseline set of standards to better safeguard the processing and movement of its citizens’ personal data. This would ensure that the users have more control over their personal data that is processed automatically. Once set in place, GDPR would require the consent of users for data processing, providing them with data breach notifications, and granting users access to closely monitor transfer of data across borders. Under the Right to Erasure Act, the user may even direct a controller to erase their personal data under certain circumstances. These tech oligarchs maintain dominance primarily by aggressive investment and acquisition strategies designed to control conceivable rivals. They deploy venture capital to provide seed stage funding for companies that eventually might challenge them. Monopoly is therefore sustained by the acquisition of potential competitor — Facebook buying Instagram and WhatsApp, Amazon buying Audible, Twitch, Zappos and Alexa. In order to break this monopoly, the regulators must ensure that the basic platform is dissociated from the add-on services, preventing companies from taking advantage of a vertical integration. A classic example of this would be the IBM case where the company was sued by the Department of Justice in 1969 for trying to monopolize its computer business, specifically by abusing its control of disk drivers. In a more recent occurrence, the European Commission lodged a case against Google asserting that the company has abused its near-monopoly in both search and mobile operating systems to require gadget makers who license Android to install Google’s search bar as their default search mechanism on their devices. A disassociation of services and the platform will also open up the space to new players, and encourage competition. In India, with no express legislation regulating data protection currently in place, (although a white paper on data security has been published by the Justice Srikrishna Committee for all the stakeholders to deliberate upon) creation of a robust cybersecurity and data protection legislation would be a good starting point. Sunil Abraham, Executive Director, Centre for Internet and Society notes that citizens in India can only approach the court of justice in case they have suffered a financial loss. Formulation of a stringent law would ensure that the citizen’s right to privacy is safeguarded in a rapidly evolving digital world. In this respect, the Government of India can learn much from the proposed GDPR Bill. Localisation of data is another imperative. Countries are increasingly pressing for mandatory storage of data in local servers. For instance, under the Data Security legislation in China, consent is required for transfer of all critical data from e-banking data to medical information, online publications and cloud computing outside its border. Countries like France, Germany, Malaysia, South Korea follow similar mandate. Appropriate tax laws and transparency clauses can also go a long way in ensuring that the revenue generated by the sector is not cornered by a few big fishes. In addition to this, tech companies should be regulated as utility-providers – requiring them to license out patents for their technology or services akin to what American Telephone and Telegraph Company (AT&T) was required to do in 1956 for a nominal fee, for its search algorithms, advertisements and other vital innovations. AT&T was the primary phone company in the United States, maintaining monopoly on telephone service until anti-trust regulators split the company in 1982. Following a court ruling AT&T was required to allow third-party devices to be attached to its rented telephones. The final blow to the monopoly came in 1982 when the company agreed to divest its local exchange service operating companies, in return for a chance to go into the computer business. Another relevant move to regulate large tech firms according to The Economist could be to deploy the concept of a regulated asset base (RAB). A model which emerged in the 1990s when Britain was privatising its water firms, the idea is to cap the profits that a monopoly would make such that it should not exceed the level that a competitive market would allow. Essentially ensuring that the monopoly’s earnings do not exceed that of a new entrant whilst replicating the incumbent’s assets. While it is often argued that any kind of restriction on technology shall curb innovation, considering the current pace at which the tech industry is moving, it is likely to meet the same fate that Standard Oil did in the United States in the early 1900s. Standard Oil, the American oil producing, transporting, refining, and marketing company established in 1870 was as mighty as the tech giants of Silicon Valley today. The company had expanded from a single refinery in Cleveland in 1863 to produce 87% of all US refined oil output. However, in 1911, the Supreme Court ordered the breakdown of the company following a judgement that the oil giant was in breach of anti-trust legislation passed by the incumbent government. While it remains to be seen what course the technology industry shall take, we can all agree upon the fact that India is in dire need for a Data Protection and Cyber Security legislation which shall set the guidelines for the regulation and use of personal and sensitive data. Moreover, since technology cannot be regulated within a particular territorial boundary, countries across the globe must come together to negotiate the terms of a universal legislation to monitor cross-border exchange of products, data and services.
Whether you believe in cryptocurrencies or not, the asset class has gained a lot of traction and acceptability among market participants. India is now becoming one of the biggest trading hubs of cryptos and things will only get bigger once domestic policymakers lay out a clear regulatory framework for this space. Like equities, investors in the crypto space must understand what they are buying into and what value/utility proposition the digital tokens hold in the long term. Below are excerpts of an exclusive interview with Rahul Raj, Co-founder and CEO of Koinex, India’s leading cryptocurrency exchange which is a must read for all crypto enthusiasts and traders based in India. We have to start off by asking your thoughts on what the Finance Minister said about cryptocurrencies in his Budget Speech….Do you think he has killed India’s cryptocurrency party? The Finance Minister’s comments in the Budget Speech was leaning towards the need for cryptocurreny regulation in India for the digital currency ecosystem, rather than a complete ban. This was also corroborated by the Cabinet Secretary of Economic Affairs, Mr. Subhash Garg in his statement about India hoping to roll out a governing regulatory framework before the end of this fiscal year. The government in fact has replaced the idiom cryptocurrency with crypto-assets, referring to possibly treating it as a commodity under SEBI guidelines. The government is focused on mitigating all possible illegal financing activities which could revolve around bitcoin and we are in unison with the government on this thought. It is important to build a robust and comprehensive framework to regulate this space. As Jaitley stated, India wants to promote the use of blockchain technology but reaffirmed their negative view on crypto-assets. Do you feel, like many in the crypto universe, that thinking of blockchain independently of cryptocurrency transactions is redundant at the moment? Blockchain technology is obviously a huge technological breakthrough and is evolving every day. If you see the concept of how blockchain functions, it is by design, applicable across sectors that use recording and updating of data. So the applications of transactional nature will always be one of the foremost users of this technology and so we do see crypto-assets as being an integral part of the blockchain universe. However, the technology will also find relevance in various other industries including advertising, retail and social media and other government sectors like property office, electorate office judiciary system etc. Many Indian residents are trading on your exchange currently. On some days, volumes in Ripple are the 20th largest globally according to coinmarketcap.com on Koinex. What makes you bullish about the future? As per industry sleuths, in the last 18-24 months, $3.5 bn of trade volumes have been recorded in India. India accounts for over 10% of the global bitcoin trading volumes. With the conversations regarding the regulatory roadmap going forward, we are optimistic about the market and find a scalable business opportunity as a lot more participation is expected on the retail front. While registering on Koinex, there is a thorough KYC process. The withdrawal and deposit system on your site is also very smooth and customer-friendly. What challenges do you see going ahead especially with respect to your payment partners? We were the first open book peer–to–peer cryptocurrency exchange to be launched in August, 2017. We were also the first to deploy a thorough KYC system and integrate that into our platform and registration process. We need users to upload their PAN details, Aadhaar details, and their picture (which is verified using image mapping). Our payment systems were running smoothly, but we did face few hiccups in the light of the recent apprehensions from the government. But we hope that when there is clarity in regards to cryptocurrency regulation and compliance and the policymakers layout a clear regulatory framework, the financial institutions will be open to partner with us. In terms of what more can be done, there can be a multi-tiered KYC process where we can categorize users in different groups such as HNI’s, high traders or politically exposed individual. We have also launched our koinex app to help users trade on the go. In your interaction with the government, do you see a good level of coordination between say the IT department, the RBI and the Finance Ministry when it comes to formulation of policy? Absolutely. A committee was formed in December which includes members from all of the above. We are sure that all stakeholders will be involved after this committee releases its report on the cryptocurrency landscape in India with its suggestions. We believe there will be a democratic process and there will be a public & industry opinion on the framework such that every stakeholder’s interests are best represented. The most iconic exchange in the world has launched Bitcoin futures in Chicago. Ethereum Exchange Traded Notes are being traded by institutional money on the Stockholm NASDAQ. Do you see crypto futures being traded in India? Crypto-assets are still in their nascent stage in India and so it will be some time before we match up with the regulated markets. These are derivative products which need even more regulation. Derivative products are one step further than trading the asset itself. Can you please briefly describe for the traders on your platform what security measures you have put in place to avoid a large scale hack going forward? Just as technology is evolving, the hackers and their techniques are also evolving. They are also constantly looking at counter attacks against our security measures. Most exchanges store their crypto pool offline in hardware wallets and it is not connected to the internet and hence is safe. We also administer traditional web layer security & blockchain security which armours the system from perils of session hijackings, SQL injections and DDoS attacks. We also have complete monitoring of all events and activities on the platform along with full record of this on a minute level. Koinex is the first multi-currency exchange with an open-book ledger format, in the country and within a short time the company grew to be one of the largest trading portal by volume, in the country. One of the key reason for their success is the cutting-edge technology, proprietary trading engine, wallet and platform architectures, grade A security, user-centric UI/UX and tons of user-demanded features that makes it seamless for the users. Do you plan on introducing more products such as alt coins going forward? Yes, we always are looking at enhancing our product offerings on the platform but these launches are strategic. A lot of due diligence is being done behind which new products to launch. We have an internal robust framework of many evaluation parameters to determine the relevance of the product in the market. The parameters include factors like details of the parent company, the tech platform, acceptance, market cap, volumes and investor backing, etc. Once the coin manages to score satisfactory results on these parameters we consider it for a launch on our exchange. This diligence also helps to weed out possible Ponzi coins and the ones which might benefit our customers in the long run. What are your thoughts on investor education? Do you plan to put up educational videos and regular analysis of market trends in the crypto space for your customers going forward? We encourage users to take a long-term view on what they buy. We have a lot of content which will help readers to understand the nuances of crypto-assets and blockchain technology. Our focus is to build awareness and debunk myths about crypto. However please note here that we do not share market intelligence or provide any buy or sell recommendations. When do you the market will be mature enough to take fiat ie. the Indian Rupee out of the picture. Do you believe if you offer XRP/BTC, there will still be substantial demand? Crypto to crypto exchanges exist in overseas market and this is something we will like to introduce as our users mature and the market gets bigger. Another question when it comes to efficient pricing (obviously liquidity has a lot to do with this) is what are your thoughts about the arbitrage opportunities that exist between domestic exchanges (like say BTC Zebpay & Koinex) as well as the price differential that exists between international markets and India. Every exchange is a local market and thus illiquidity can lead to different prices. Arbitrage opportunities do exist. We want to make it clear that all the bids and asks you see in the publicly available order book are our users and we do not do any market making or proprietary trading. The pricing mechanism is efficient and driven only by supply and demand dynamics. On the point about the premium of domestic crypto prices over the international USD price, we can again attribute that to strong demand for these assets. The stance in the crypto universe seems too binary: either people are for it or massively against it. What is your long term structural view in this space? Every new disruptive technology or innovation always faces a strong opposition because as a society we are averse to change. Technology will always be a step ahead because innovation comes first, followed by regulation. But like all other transformational technology, be it World Wide Web or artificial intelligence, even blockchain technology will bring a paradigm shift in our ecosystem. It is here to stay. Blockchain technology offers a transparent, secure and efficient peer to peer value transaction proposition which is a force to reckon with and will eventually attain mainstream acceptance.
2017 was a bizarre year for cryptocurrencies. While it grabbed a lot of headlines, the focus of media was largely on the price of tokens such as Bitcoin, Litecoin, and Ether. More coverage led to increased price volatility and in a vicious circle of hype and frenzy, Bitcoin’s growth mirrored the Tulip Mania of 1637. Such unchecked trading exuberance has completely missed the point of cryptocurrencies, relegating them to just another commodity with cookie cutter technical analyses obsessing over price movements. Bitcoin? That’s so 2017! Some experts are now suggesting Bitcoin is not just a digital asset, but in fact a new digital 'store of value'. A bold claim indeed, and one which needs to be probed further. More importantly, as an informed investor one must figure how to evaluate the intrinsic value of new digital currencies and assets. Unfortunately, a 52-week moving average price chart does not really say much about that. We will have to interrogate a bit deeper. How to determine value? An mp3 file is a digital asset. Its contents determine its value, and consequently its price on a digital marketplace. However, to be a 'store of value’, the asset should be able to retain its purchasing power and be predictably useful when retrieved from storage after a long period of time. This is easy to reflect for physical assets. Gold for example, is predictably useful for its huge ornamental value and for its use as raw material in a range of industries. It is gold's unique conductivity, malleability, low reactivity (what keeps the bling on) and finite availability that has made it a popular store of value in history. Now let’s look at the uses and characteristics of Bitcoin to determine its value. Bitcoin is a decentralized, distributed, digital payment token used on the first, most widely adopted Blockchain, popularly known as the Bitcoin Blockchain. Each Bitcoin token records every transaction it has been a part of, tracing its journey all the way back to when it was first generated, eliminating the need for any intermediaries. Great! So if I convert my fiat currency into Bitcoin, what are the advantages? I am now able to process cheaper transactions! Not really. While that was true initially, the recent surge in trading and volume of Bitcoin transactions has overloaded the network and made it harder to mine new tokens, or more expensive to settle transactions, with per transaction fees hitting $50 in December 2017. I am able to complete transactions more quickly! Try again. Globally, the payments industry is moving towards an era of instant payments. Interestingly, other Blockchain technologies (not Bitcoin) are helping make the transition - Ripple is a crypto asset used by banks to cut down the time for international payments. However, Bitcoin is notorious for unpredictable settlement times, with the average time for transaction confirmation anywhere between 30 mins to 16 hours. My digital wealth is more secure in Bitcoin! Jury's out on that one. While each Bitcoin token conserves a traceable record of its transactions, recent thefts, frauds and even outright scams in the Bitcoin and the wider cryptocurrency world do not build confidence in the system. Bitcoin runs on a completely public, decentralized Blockchain not controlled by any organization. It provides no protection against theft or fraud due to the absence of any kind of central regulator to efficiently intervene and influence the Blockchain. Contrast this with the presence of regulatory oversight and large investment in IT security within the existing banking system. So, what can I do with Bitcoin that I can't do with ease in the existing system?! How about untraceable, anonymous electronic payments? Yes, now we are on to something. The Bitcoin Blockchain has a strong use case for anonymous transactions, which could include providing cash flow for illegal money transmission and dark market transactions via the Internet. But is that enough to justify the immense premium on its price? As its popularity with crime rises, so does the action from regulatory bodies and governments. Ironically, it is easier to combat nefarious activities with digital currencies, than it is with cash. A country simply outlaws Bitcoin exchanges and illegal money transmission will have to move back to older methods. Such a move would also demolish the Bitcoin 'network effect' - it doesn't matter how wide the network adoption is if it's a closed loop and one can't lawfully exchange Bitcoins for legal currency. Assuming those are the major sources of value for a Bitcoin token (and I encourage readers to suggest any omissions) how confident are we in declaring Bitcoin a 'store of value'? It is already left with little value to offer, especially in the face of competition from technologically advanced Blockchains. On the Ethereum Blockchain for instance, tokens called Ether can store historic transactions (like Bitcoin) as well as business logic in the form of programming code (way beyond Bitcoin). The token can trigger ‘smart contracts’ based on a set of predefined rules, without the need for human intervention. Using this enhancement, clever programmers are building DApps or distributed apps. DApps are not hosted on central servers but distributed on the servers of its users. This decentralization prompts use cases beyond simple money transmission. For example, there could be a Voting DApp, which registers each vote, stores it on the Blockchain and reports election results directly without the need of a central authority (which might be susceptible to foul play). From secure data sharing, to combating against single points of failure, and coordinating interactions between millions of Internet-of-Things devices, a programmable Blockchain can be the foundation for a host of digital solutions. Initial Coin Offerings : A New Class of Capital for Digital Businesses The true value of a Blockchain and its corresponding cryptocurrency is derived from what its token enables the user to do. Consequently, these tokens are now instruments, giving rise to exciting new funding models for digital businesses. Initial Coin Offerings or ICOs emerged in 2017 as a new way to raise funds for crypto projects. To be perfectly clear, an ICO is vastly different from an IPO. To illustrate, say you want to raise funds for a new app that connects anyone with a smartphone to a qualified doctor at the tap of a button. To raise money for the app development, you launch an ICO. In that ICO (and this is a heavily simplified explanation) you offer 100 ‘DoctorCoins’ in return for every $10 to your investors. What are ‘DoctorCoins’? These are the crypto tokens in your Doctor app. Behaving like an in-app currency, users will need to exchange ‘DoctorCoins’ to connect with doctors, say 1 ‘DoctorCoin’ in exchange for answering a health query via text or 5 ‘DoctorCoins’ for a 15 minute video call session. These ‘DoctorCoins’ can be purchased separately and are priced accordingly at cryptocurrency exchanges. In an ICO, investors do not receive equity in the company for their initial investment. Instead, they receive a chunk of the in-app economy. So, as an ICO investor in your Doctor app, I have a choice when the app launches – use my ‘DoctorCoins’ as intended in the app or wait for your app to gain popularity and then resell my initial allocation of ‘DoctorCoins’ at a price higher than $10. This presents an interesting evolution in the area of capital markets. Debt providers are coldly focused on recovering their capital and a pre-determined interest. Equity holders are largely only concerned with the profit and loss statement of a business, often celebrating ‘one-off’ gains that have little relevance to ongoing business strategy. ICO investors however, are actually early adopters of a product they invested in. By being the first, often evangelical users of a new product, ICO investors have a built-in incentive to increase the adoption of a new product, as that will raise the value of the in-app economy. To do that, they champion the usage of the product, give feedback to the development team for improvements and actively promote the new product through their social networks to help increase usage and adoption in an organic way. This way, an ICO investor can prove to be a more useful class of capital for digital businesses, than debt or equity. However, it also means that an ICO investor must be sophisticated enough to understand the risks and viability of crypto projects. There is a need for regulatory oversight to stabilize the ICO market and its participants. Given the speed with which things are moving in this space, I strongly believe that we will see ICOs as a dominant form of fundraising for digital products and startups by 2020. 2018: Speculative trading gives way to meaningful adoption Bitcoin has spawned out of the first iteration of Blockchain technology. Like all first iterations, it started from a place of pure creativity, innocence and wonder. A decade since inception, the concept of the Blockchain has been widely welcomed, adopted and adapted. Efforts are on to optimize it for practical, real world applications that provide a great user experience. While 2017 was the year of the Bitcoin, 2018 will be the year in which the spotlight will firmly shift to the broader world of Blockchains. This has happened before in the digital world. MySpace and Orkut were early implementations that brought the phenomena of Social Networking to limelight. Eventually, both were surpassed with newer and better implementations – Facebook, LinkedIn and Twitter. More broadly, social networking went on to firmly establish itself as one of the key pillars of the Internet – no app or website worth your time comes without a social integration. Blockchains have the potential to go beyond that, because they are more than simple websites or apps. Like the Internet itself, blockchains are the foundation layer on which fascinating and useful complexity can be built. In many ways, blockchains are like mini-internets, and the successful ones will be those which imbibe the original ethos of the internet - open source, decentralized and distributed operations, that easily allow people and ideas across continents to come together and create something special. 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Editor's Comment: With South Korea and China's real and alleged crackdown on Bitcoins as well as the broad cryptocurrency world, several other 'assets' such as Ripple are capturing popular imagination. Often treated synonymously with the former, Ripple has a different structure which makes it easier to view as a 'store of value.' A general lack of awareness of this crypto asset is suggestive of the overall frenzy of our times. Isaac Newton once said that he could calculate the motion of heavenly bodies but not the madness of people. Newton is believed to have lost almost all of his fortune during the South Sea bubble in the spring of 1720. Nothing epitomizes this more than the frenzy we are currently witnessing in the cryptocurrency space. In recent weeks, crypto ‘enthusiasts’ have turned their attention from Bitcoin to ‘cheaper’ assets such as Ripple, Stellar and Tron. To begin with, Ripple is nothing like Bitcoin. Anybody who believes they are getting in on the next Bitcoin while buying Ripple are hugely mistaken. Ripple is not a cryptocurrency, rather a technology services provider, one which should ideally be listed on the NASDAQ. Another aspect often forgotten by enthusiasts is that in many senses, Ripple is not truly decentralized and has a strong control over its inner mechanisms. Ripple uses a novel consensus algorithm to validate transactions. It requires computers to identify themselves and obtain permission to be able to participate in the currency’s network. This stands in stark contrast to Bitcoin, where any computer is allowed to join, without any authentication. Unlike Bitcoin which relies on a network of “miners” running codes that validate transactions and keeps the currency secure - Ripple’s setup has no miners. All 100 billion coins of XRP (Ripple issued currency) that exist were created when the network was launched in 2012. Its creators kept 20 billion and gave the rest to the company. Since then, Ripple has been “methodically” distributing tokens to clients, still holding 50 billion in an escrow account. To ensure long-term stability, Ripple announced the structured sale and use of its currency. Thus, ensuring that investors have some sense of what's in store and can be assured that there won’t be a supply shock leading to price capitulation. Traders and investors should focus on the market capitalization of Ripple. A question they should ask themselves while buying Ripple is whether the prevailing market cap is rational, assuming the most bullish potential scenarios going forward. Ripple has an end use case scenario providing us with a basic framework for its valuation. It aims to be a “bridge currency”, one that many financial institutions use to settle cross-border payments faster and cheaper when compared to global payment networks. Bitcoin could be used to the same effect, but Ripple can settle a thousand transactions per second, compared to Bitcoin’s seven, with much lower transactional costs. This is Ripple’s ‘secret sauce’ and the reason why its management believes the currency’s true value is much higher. The company claims that more than 100 financial institutions are using its technology. But it remains to be seen just how seriously big banks and financial institutions use Ripple as a currency in itself. Now let’s try to do a quick back of the envelope valuation for Ripple. Assuming that the global daily foreign exchange volume is $5 trillion. Suppose Ripple has 10% market share and moves around $500 billion a day, using the XRP network for major banks and financial institutions. Considering it can capture 0.1% of the notional sum above as revenue, it amounts to $500 million of revenue per day. That is $15 billion a month and $180 billion a year of annual revenues. Assuming no costs and using a simple (and generous) forward revenue based multiple of 2, one can value Ripple at $360 billion. At Ripple’s current price of $2, its market cap stands at $80 billion. If one were to use the above framework (and the reader can tweak around with the numbers to arrive at his/her own fair value), one can arrive at a target price of above $8 which implies a 4x return. Build your own models and frameworks before buying Ripple. Don’t buy it because it is available for $2 per unit. Remember there is a difference between price and value.
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 employment. 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 employment growth 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 insure 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
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.
The Mahabharat is one of the oldest and longest Epic poems in the world. The influence of the sacred text on Indian culture is deep and profound. Though the central story is that of the “Great War” and the circumstances that lead to it; it contains enormous life lessons all along. Bhagavad Gita, one of the most revered texts among Hindus, is also a part of the Mahabharat. Here we dig into this holy epic, unearthing some valuable investment lessons. Respect the Power of Time In the Bhagavad Gita, Krishna who is the avatar of Lord Vishnu proclaims that he is the Almighty Time. “I am time, the destroyer of all; I have come to consume the world”. – Bhagavad Gita This statement alone is indicative of the importance of time, which is equivalent to God. This is particularly true in case of personal finance. There exists the concept of ‘time value of money’, that is, a rupee today is worth more than a rupee an year later. Essentially, the value of money progressively degenerates with passing time. Inflation also eats away the value of a currency. Therefore, it is rational to select instruments of investments such, that the rates yielded by them overcome the effects of time decay and increase the overall value. Power of compounding helps build a large corpus through small contributions. A compound interest on your investments, yields interest on both principal and the accumulated interest. The “power” in the power of compounding materializes only when the investment has been made in the right financial instrument for the right amount of time. Time works both for and against an investor. It is the prime component in valuing and comparing investments. Time indeed is the real god in the world of finance. Goal Planning is Important Once, the young Pandavas and Kauravas were taken by their Guru Dronacharya for a test. The objective of the test was to assess the target hitting capacity of the students. They were supposed to hit the eye of an artificial bird hanging from a tree at a distance with an arrow. The brothers were excited to take the aim, but before they could start, the Guru asked them a simple question. “What do you see?”, he asked. Everyone but one, answered whatever they could see – the trees, sky, leaves etc., and they were not allowed to even aim the target. When Arjun’s chance to answer came, he replied that he could only see the bird’s eye and he was allowed to hit the target which he successfully did. The vital lesson from this short piece is, it is only once the target has been identified precisely, would there be any possibility of hitting it. The purpose of investment should be defined at the outset. This will enable one choose the appropriate route to be taken and efficiently plan the time available to complete it. For instance, a young person saving for his retirement would have a long time to achieve his goal. Therefore, it would be beneficial to allocate most of the funds for this purpose into equities. Equities are less risky in the long term and provide the best returns. On the other hand, a person who is about to retire in a few years should keep most of his investments in debt. Don’t get caught up in the unnecessary clutter while pinpointing your goals, it has to be marked and measured so that the most optimum route could be chosen to achieve it and a scale could be used to appraise it. Expert Advice is Always Helpful When Duryodhana was offered the mighty army by Krishna, he was delighted. He thought in the event of war, the huge army would be a much more useful asset than one Krishna. Arjun who was much more knowledgeable always wanted Krishna by his side, even though Krishna would not fight the war. Eventually, he became Arjun’s “Saarthi” or charioteer and advisor all through the war. Arjuna was one of the wisest men of his time, yet he chose someone who would drive him through the war literally and mentally. Krishna was a righteous guru and Arjun was the perfect disciple. Arjun and Krishna prevailed while Duryodhan perished at the end of the war. Thus, it's very important to take advice from an expert when it comes to managing your finances and investments. The aim should be to achieve the righteous goal, here, in this case, it is the corpus for whatever purpose one is saving. A good financial advisor would take you through the volatility of markets, through its ups and downs, and make sure your ultimate investment goal is fulfilled. There are several instances in the Mahabharat emphasizing the importance of a virtuous and candid advisor. There would have been a sure and brutal defeat for the Pandavas if Krishna would not have convinced Arjun to fight the war. Likewise, a good financial advisor would help you make decisions when you are in doubt, recommend solutions for your financial problems and help you choose the right path when you are struck by indecision. He would be stoic, objective and clear towards the course that should be taken. Don’t Venture into Unknown Territory Yudhisthira agreed to gamble (Dyut) with Duryodhana, despite knowing nothing about the game. Shakuni was a notorious expert of the game; it was as if the dices followed his command, and he was to play on behalf of Duryodhana. As expected, Yudhisthira began to lose. At the end of the game, he lost his everything – his wealth, his wife and his brothers to the game. The humiliation of the Pandavas and harassment of their wife Draupadi ensued. The real seed of Mahabharat or the Great War was planted as Pandavas took oaths to destroy Kauravas. The lost wealth and properties of Yudhisthira were reinstated by Gandhari, mother of Duryodhana, through a boon to Draupadi. But Yudhisthira again played the game and this time too he lost. The Pandavas were to be banished for thirteen years. The lessons that an investor can take from this excerpt are numerous. The first is to never try investments, which you personally do not understand, without the help of a skilful advisor. Many people invest in products just on the promise of returns and often get duped. Be very clear about the risk-return profile of the financial products and also of the reputation of issuing companies. The lure and excitement in products that are volatile like derivatives, which have a very high risk-return profile, compel many to invest in them. Equipped with little knowledge and meagre resources at their disposal, they end up on the losing side. Subsequently, these people blame the market. Manage your emotions and learn from the history so that the past mistakes are not repeated. Another major point of focus is to measure the capacity of the risk that you can take without being insolvent and the risk that the prospective investment may offer. Even in the worst case scenario, it should not affect your normal well being. Many people in the euphoria of bull market start investing in equities at higher valuations and get shocked when a little correction or a bear phase occurs. They go beyond their risk tolerance levels during a Bull Run and suffer great anxiety and stress when they see their investment value going down below the initial investment. Sometimes a Little Sacrifice is good for the Ultimate Goal Karna had a special weapon given as a boon by Indra. This weapon was being preserved by him to kill Arjun. When Karna was wreaking mayhem on the battlefield and seemed unstoppable, Krishna urged Pandavas to let Ghatothkach fight him instead of Arjun. This was done as the exotic weapon in possession of Karna was a deadly threat to Arjun. Ghatothkach was the son of Bheem and a powerful warrior; he fought with great valour and forced Karna to use the weapon on him. This weapon could only be used once and as a corollary, it was impossible to kill Arjun or defeat Pandavas now. Ghatothkach was killed and was a major loss to the Pandavas but during that time winning the war was the supreme objective and for that Arjun’s presence throughout the war was essential. An investor who wants to be a winner in the Kurukshetra of markets and attain financial freedom has to make crucial sacrifices. He has to make rational decisions based on logic and reason. A good starting point will be to start saving according to the financial plan, forego dispensable expenses and invest in a sustained and disciplined manner. Only then can one invest successfully and emerge as a smart investor. There are numerous characters in the Mahabharat and each of them have distinct characteristics – unique, with peculiar philosophies and idiosyncrasies. Similarly, every individual has a different expectation from his investment. However, this must be backed by a clarity of goals, strong determination and complete devotion. Mahabharat is a giant body of work that has knowledge and wisdom sprinkled generously throughout. Here we have discussed a few of them that will inspire us towards financial prudence. Financial well-being can only be ensured by taking informed decisions, followed by apposite action. The advantage of superior knowledge is fully realized only when it is applied appropriately.
Retirement is not the end of an active life. Instead, it marks a period where you can finally enjoy an abundance of leisure, pick up on hobbies, travel, or just do things you couldn’t do before. A general increase in life expectancy and standard of living has made this phase longer and healthier. But retirement can be painful and depressing too, especially if one’s financial security is in doubt. Many retirees find themselves helpless, not having saved enough. While some are forced to hold on to their jobs for longer, others are at the mercy of their children or relatives. Strangely, planning for retirement is a lowly ranked financial goal for India’s working population. Not paying sufficient attention to it is a sure-shot way to chaos, especially when one is not at his/her best health. Seeds of investments planted in earlier years are the only way to reap fruits of prosperity later in life. The article discusses the fundamentals of retirement planning. In India, the central and the state government provide retirement benefits to their employees in the form of regular pensions. On the other hand, employees of most private organizations and those working in the informal sector have no such facility. They must plan their retirement themselves. With the disintegration of the joint family, they no longer have a support system to depend on. Though there are a few government schemes and regulations to help people save and accumulate a retirement corpus, in most cases they are ineffective. Take the example of tax benefits under section 80C of the Income Tax Act. People invest in financial products to avail tax exemptions. But in a haste to save taxes, they end up purchasing financial instruments which are inferior or less suitable for their needs. The importance of retirement planning in early stages of life has a significant impact on accumulated value and yet people choose to neglect it. Even those who do plan timely often miss out on certain important factors such as inflation or asset allocation, thereby ending up with inadequate money. Goal-based planning is still not mainstream. Let’s look at a few commonly over-looked points: Starting Early Individuals underestimate the power of compounding. The effect of starting early, even with a small amount can be significant. An INR 5, 000 monthly SIP in an equity mutual fund started at the age of 25 would be worth INR 7.4 crores by the time you hit 60. The same SIP if started when you are either 30 or 40 would be worth INR 3.5 crores or INR 76 lakhs respectively upon retirement (assuming 15% annual return). Likewise, an INR 5, 000 monthly investments in the Public Provident Fund (PPF) at the age of 25 could be worth INR 1.2 crores on retirement, while the same investment if done at 40 would be only worth INR 31 lakhs. The following graph presents the amount accumulated at the age of 60 by three different financial instruments if INR 5,000 monthly investment is made by individuals of different ages. The rates of returns (per annum) are taken to be 8.5%, 8.25%, and 15%, for a Recurring Deposit (RD), PPF, and Equity mutual fund respectively. The amounts are shown in INR crores. Another advantage of starting early is the ability to take greater risks in the search for better returns e.g. by investing a part of one’s portfolio into equities. Risk appetite only goes down with increasing responsibilities and health constraints. Estimating the Required Amount The amount of money required for a comfortable retirement should be estimated keeping in mind the rate of inflation, the desired standard of living as well as present income. You can arrive at a ballpark figure by calculating the future value of your current monthly income, as at retirement. Take this amount and calculate the present value of each monthly installment, required during the non-earning period (20 to 30 years), at the inflation-adjusted real rate of interest. Since this estimate just gives a reference point, the plan must be monitored regularly. Inflation is the ultimate wealth destroyer. To put it in perspective, INR 11.4 lakhs would be equivalent to INR 1.0 crore, in today’s terms, after 30 years. If INR 50,000 is your present monthly expenditure, 30 years from now, you would require INR 4.4 lakhs per month to maintain the same standard of living. Inflation, assumed here at 7.5% per annum (roughly the long-term average for India) is the sole reason behind value erosion. False notions such as expenses go down after retirement (expenses rarely go down and instead tend to increase due to higher medical expenses) or the pension should suffice has pushed many people towards financial stress when they are at their most vulnerable point. A pension is only half of one’s last drawn salary – and it cannot be sufficient to maintain one’s existing lifestyle. The remainder has to come from investments. Creating a Good Plan There are various financial products with different risk-return profiles available in the market. Many find themselves unable to understand these products or the associated jargon of the financial world. With little time spent on research, they end up buying the wrong product or one with lower returns like ULIPS etc. For such people, an experienced financial advisor, who could help in building a sound portfolio as per the risk appetite and return expectations of their client, is a very important resource. The assistance of a financial advisor could add tremendous value to the overall portfolio as it would be managed dynamically. People who are wary of the stock market must overcome their illogical fear and allocate a part of their savings towards equities. A little allocation towards stocks will help them understand the volatility of the markets and, realize that in the longer term, equity market can lead to true wealth creation. To beat inflation, a portion must be allocated to equities, especially through mutual funds. Some Investment Options Available for Retirement Planning: Equities & Equity Oriented Schemes: This is one asset class that has been consistent in beating inflation and creating wealth at a faster pace. Though direct equity exposure could be quite risky, investing in equity mutual funds which are professionally managed diversified portfolios can offer great long-term returns. Investors can invest in mutual funds as they please – monthly, yearly or a lump sum. However, a disciplined approach is recommended. Systematic Investment Plans or SIPs as they are popularly called form one such approach to create wealth in the long term by investing in mutual funds in an organized, continuous and periodic way. EPF/PPF: These are essentially debt instruments which provide a safety net but with a lower rate of return amounting to 8.5% per annum. EPF is for salaried people with the employer and employee contributing 12% of the basic (plus dearness). PPF is used by self-employed people to create a long-term corpus. Both EPF and PPF are tax efficient products where contributions are deductible under section 80C and, interest, as well as the principal, is accumulated tax-free. These products are good for risk-averse investors, but even for them investing entire savings in such product could lead to low accumulation at the retirement. National Pension Scheme (NPS): NPS is a pension scheme regulated by the Central Government. While all Central Government employees are mandatorily covered by this scheme, it is open to all Indian citizens on a voluntary basis. Since one portion of the NPS is invested into equities, the scheme does not offer guaranteed returns. But at the same time, it can earn higher than traditional tax-saving investments like PPF. NPS has been around for a few years now and has managed to deliver an average of 8%-10% annualized returns. An additional deduction for investments of up to INR 50,000 is available for NPS under subsection 80CCD (1B). This is over and above the deduction of INR1.5 Lakh available under section 80C of Income Tax Act. People who are still confused should consult a professional financial adviser so that they start saving for their retirement the right way. People who are about to retire and have not planned well for their retirement should start managing their finances immediately and take help from advisers if they cannot figure out the way forward. Creating a robust plan is a start, but managing it year after year, modifying it when required is of utmost importance. Life after retirement can be a long pleasant vacation for people who have been meticulous and dedicated to achieving their retirement goal.
US bond yields have risen from historic lows, they should rise further, they may not; The Federal Reserve is beginning to reduce its balance sheet, other Central Banks continue QE; US bonds may still be a safe haven but a hawkish Fed makes short duration vulnerable; Short dated UK Gilts may be a safe place to hide, come the correction in stocks. US Bonds I used to think if there was reincarnation, I wanted to come back as the president or the pope or a .400 baseball hitter. But now I want to come back as the bond market. You can intimidate everybody. – James Carville 1993 Back in the May 1981 US official interest rates hit 20% for the third time in 14 months, the yield on US 10yr Treasury Bond yields lagged somewhat and only reached their zenith in September of that year, at 15.82%. In those days the 30yr Bond was the global bellwether for fixed income securities; its yield high was only 15.20%, the US yield curve was inverted and America languished in the depths of a deep recession. More than a decade later in 1993 James Carville, then advisor to President Bill Clinton, was still in awe of the power of the bond market. But is that still the case today? Back then, inflation was the genie which had escaped from the bottle with the demise of the Bretton Woods agreement. Meanwhile, Paul Volker, then Chairman of the Federal Reserve was putting into practice what William McChesney Martin, one of his predecessors, had only talked about, namely taking away the punch bowl. Here, for those who are unfamiliar with the speech, is an extract; it was delivered, by Martin, to the New York Bankers Association on 19th October 1955: "If we fail to apply the brakes sufficiently and in time, of course, we shall go over the cliff. If businessmen, bankers, your contemporaries in the business and financial world, stay on the sidelines, concerned only with making profits, letting the Government bear all of the responsibility and the burden of guidance of the economy, we shall surely fail. … In the field of monetary and credit policy, precautionary action to prevent inflationary excesses is bound to have some onerous effects–if it did not it would be ineffective and futile. Those who have the task of making such policy don’t expect you to applaud. The Federal Reserve, as one writer put it, after the recent increase in the discount rate, is in the position of the chaperone who has ordered the punch bowl removed just when the party was really warming up." Back in the October 1955 the Discount rate was 2.30% and the 10yr yield was 2.88%. The economy had just emerged from a recession and would not embark on its next downturn until mid-1957. Today the US yield curve is also unusually flat, especially by comparison with the inflationary era of the 1970’s, 1980’s and 1990’s. In some ways, however, (barring the inflationary blip in 1951-52) it looks similar to the 1950’s. Here is a chart showing the 10yr yield (blue – LHS) and US inflation (dotted – RHS): Source: Trading Economics I believe that in order to protect the asset markets (by which I mean, principally, stocks and real estate) the Federal Reserve (charged as it is with the twin, but not mutually exclusive, objectives of full-employment and stable prices) may decide to focus on economic growth and domestic harmony at the expense of a modicum of, above target, inflation. When Fed Chairman, Martin, talked of removing the punch bowl back in 1955, inflation had already subsided from nearly 10% – mild deflation was actually working its way through the US economy. Central Bank Balance Sheets Today there are several profound differences with the 1950’s, not least, the percentage of the US bond market which is held by Central Banks. As the chart below shows, Central Banks balance sheet expansion continues, at least, at the global level: it now stands at $14.6trn: Source: Haver Analytics, Yardeni Research Like the Fed, the BoJ and ECB have been purchasing their own obligations, by contrast the PBoC’s modus operandi is rather different. The largest holders of US public debt (principally treasury bonds and treasury bills) are foreign institutions. Here is the breakdown as at the end of 2016: Source: US Treasury As of November 2017 China has the largest holding of US debt – US$1.2trn (a combination of the PBoC and state owned enterprises), followed by Japan -US$1.1trn, made up of both private and public pension fund investments. It is not in the interests of China or Japan to allow a collapse in the US bond market, nor is it in the interests of the US government; their ability borrow at historically low yields during the last few years has not encouraged the national debt to decline, nor the budget to balance. Bond Markets in Europe and Japan The BoJ continues its policy of yield curve control – targeting a 10bp yield on 10yr JGBs. Its balance sheet now stands at US$4.8trn, slightly behind the ECB and PBoC which are vying for supremacy mustering US$5.5trn apiece. Thanks to the persistence of the BoJ, JGB yields have remained between zero and 10bp since November 2016. As of December 2017 the BoJ owned 46.2% of the total issuance. The ECB, by contrast, holds a mere 19.2% of Eurozone debt. Another feature of the Eurozone bond market, during the last couple of years, has been the continued convergence in yields between the core and periphery. The chart below shows the evolution of the yield of 10yr Greek Government Bonds (LHS) and German Bunds (RHS). The spread is now at almost its lowest level ever. This may be a reflection of the improved performance of the Greek economy but it is more likely to be driven by fixed income investors continued quest for yield: Source: Trading Economics By contrast with Greece (where yields have fallen) and Germany (where they are on the rise) 10yr Italian BTPs and Spanish Bonos have remained broadly unchanged, whilst French OATs have seen yields rise in sympathy with Germany. Hopes of a Eurobond backed by the EU, to replace the obligations of peripheral nation states, whilst vehemently denied in official circles, appears to remain high. Japanese and European economic growth, which has surprised on the upside over the past year, needs to prove itself more than purely cyclical. Both regions are reliant on the relative strength of US the economic recovery, together with the continued structural expansion of China and India. The jury is out on whether either Japan or the EU can achieve economic terminal velocity without strong export markets for their goods and services. The one country in the European area which is behaving differently is the UK; yields have risen but, it stands apart from the rest of the Eurozone; UK Gilts dance to a different tune. Uncertainty about Brexit caused Sterling to decline, especially against the Euro, import prices rose in response, pushing inflation higher. 10yr Gilt yields bottomed in August 2016 at 50bp. Since then they have risen to 1.64% – this is still some distance from the highs of January 2014 when they tested 3.09%. 2yr Gilts are different matter, with a current yield of 71bp they are 63bp from their lows but just 22bp away from the 2014 high of 93bp. Conclusions and Investment Opportunities From a personal investment perspective, I have been out of the bond markets since 2013. My reasoning (which proved expensive) was that the real-yields on the majority of markets was already extremely negative and the notional yields were uncomfortably close to zero. Of course these markets went much, much further than I had anticipated. Now I am tempted by the idea of reallocating, despite yields being lower than they were when I exited previously. Inflation in the US is 2.1%, in the Euro Area it is 1.3% whilst in Japan it is still just 1%. As a defensive investment one should look for short duration bonds, but in the US this brings the investor into conflict with the hawkish policy stance of the Fed; that is, what my friend Ben Hunt of Epsilon Theory dubs, the Inflation Narrative. For a contrary view this Kansas City Fed paper may be of interest – Has the Anchoring of Inflation Expectations Changed in the United States during the Past Decade? In Japan yields are still too near the zero bound to be enticing. In Germany you need to need to go all the way out to 6yr maturity Bunds before you receive a positive yield. There is an alternative to consider – 2yr Gilts: Source: Trading Economics UK inflation is running at 3% – that puts it well above the BoE target of 2%. Rate increases are anticipated. 2yr Gilt yields have recently followed the course steered by the US and Germany, taking out the highs last seen in December 2015, however, if (although I really mean when) a substantial stock market correction occurs, 2yr Gilt yields have the attraction of being near the top of their five year range – unlike 2yr Schatz which are nearer the bottom of theirs. 2yr Gilts will benefit from a slowdown in Europe and any uncertainty surrounding Brexit. The BoE will be caught between the need to quell inflation and the needs of the economy as a whole. 2yr Gilts also offer the best roll-down on the UK yield curve. The 1yr maturity yields 49bp, whilst the 3yr yields 83bp. With inflation fears are on the rise, especially in the US and UK, 2yr Gilts make for an uncomfortable investment today, however, they are a serious contender as a safe place to hide, come the real stock market correction. Originally Published in In the Long Run
Editor's Comment: American business magnate, investor and philanthropist Warren Buffett recently published his Annual Letter to the shareholders of Berkshire Hathaway, Buffet’s multinational conglomerate-holding company headquartered in Omaha, United States. These letters, which have now been written for more than 50 years are closely scrutinized by analysts and investment professionals for priceless musings on investing, business and economy. In this year’s edition released on the 24th of February, Warren Buffett focused on the conglomerate’s future plans, investments, and troubles with accounting, while giving out invaluable investment advice. In a world where investors are drowning in information but starving for wisdom, we are incredibly lucky to receive an annual doze of distilled investing wisdom straight from one of the greatest masters of the craft, that too for free! They say the greatest education is watching the masters at work. One such master piece comes in the form of Warren Buffett’s Annual Letter to shareholders. I honestly believe there is much more wisdom packed in those 20 odd pages than that can be found in many books put together. I poured over Buffett’s latest Annual Letter, and here are 10 nuggets of wisdom I could find. I have made no attempt to comment on these gems as that would be a futile exercise. The risk of diluting such distilled wisdom does not elude me. So sit back, read these gems slowly, pause and reflect on each one of them. Hope you find them as useful as I found them to be. In our search for new stand-alone businesses, the key qualities we seek are durable competitive strengths; able and high-grade management; good returns on the net tangible assets required to operate the business;opportunities for internal growth at attractive returns; and, finally, a sensible purchase price. Our aversion to leverage has dampened our returns over the years. But Charlie and I sleep well. Both of us believe it is insane to risk what you have and need in order to obtain what you don’t need. The less the prudence with which others conduct their affairs, the greater the prudence with which we must conduct our own. Betting on people can sometimes be more certain than betting on physical assets. Charlie and I view the marketable common stocks that Berkshire owns as interests in businesses, not as ticker symbols to be bought or sold based on their “chart” patterns, the “target” prices of analysts or the opinions of media pundits. There is simply no telling how far stocks can fall in a short period. Even if your borrowings are small and your positions aren’t immediately threatened by the plunging market, your mind may well become rattled by scary headlines and breathless commentary. And an unsettled mind will not make good decisions. Performance comes, performance goes. Fees never falter. Though markets are generally rational, they occasionally do crazy things. Seizing the opportunities then offered does not require great intelligence, a degree in economics or a familiarity with Wall Street jargon such as alpha and beta. What investors then need instead is an ability to both disregard mob fears or enthusiasms and to focus on a few simple fundamentals. A willingness to look unimaginative for a sustained period – or even to look foolish – is also essential. Stick with big, “easy” decisions and eschew activity Knowledge comes from learning, wisdom comes from living. Let us strive to apply this investing knowledge. Happy investing!!! Originally Published in Stock and Ladder
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.
It all starts with the classification of affordable housing itself...affordable for what, and by whom? The prevalent supply-demand mismatch in the affordable or low cost housing projects in India is a consequence of this subjectivity. To fully understand how to make the much publicized Pradhan Mantri Awas Yojana (PMAY) scheme work, nothing works better than gaining some case-by-case context. For instance, a young family with children require a larger home in comparison to a retired couple whose children are away. Yet, an "affordable" home for the former continues to elude. Ownership must be fungible to ensure such gaps between requirement and ability are bridged. Consider the following two examples. A home loan with a "hire purchase" plan where the buyer pays an initial deposit to take occupancy, while paying the remainder balance (plus interest) over an extended time-period before taking possession. The property is owned by the vendor till the last payment is cleared. A government employee typically pays a nominal rent for government-owned accommodation and, on a transfer, relocates to another home where he continues to pay rent till retirement when he must vacate. The government gives him a pension and other benefits, yet the payments made for rent are not deemed as instalments for a home. Perhaps a combination of these two is the way forward. The idea would be to club the viability of occupancy from the former and fungibility of ownership from the latter. The government can focus on subventing investments in group housing projects and enable roll-out of hire purchase plans. State-owned Housing Boards can take the lead. The model should allow buyers to roll forward their installment payments (made to centralized housing funds) when they move from one employer to another, like Employee Provident Fund (EPFO) and National Pension Scheme (NPS scheme) contributions. That way private sector labour mobility will be assured and employees will not lose any upside. They would be eligible to receive a housing allotment of similar size and specifications at the new place of work where they then continue to pay the outstanding instalments till the home becomes theirs. The government (which acts as the vendor) will own the asset till the maturity of the plan. Affordable housing in India as a result can become truly commoditized and house ownership can be a liquid concept. Putting in place reforms which would accommodate such flexibility in the present Pradhan Mantri Awas Yojana (PMAY) will be a desirable step towards ensuring that affordable housing in India becomes truly affordable.
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.
Amidst skeletons tumbling out post the infamous Nirav Modi scandal, the Union Cabinet’s decision to setup a National Financial Reporting Authority (NFRA) regulating Chartered Accountants (CAs) in India is considered as a way forward in monitoring the financial audit of large companies. However, the big question is, can the super regulator recover the money lost in frauds? If the answer is no, then isn’t it more logical to strengthen the existing system rather than creating another layer of bureaucracy through NFRA? The idea of NFRA is not new. The constitution of the independent regulator was a key recommendation of the Companies Act 2013, which came into force on April 1, 2014, but its establishment stayed in limbo. It is quite evident that the Union Cabinet’s decision to set up the NFRA earlier this month has been prompted by the INR12,636 crore PNB scam that went undetected by auditors. The power of the super regulator, which will oversee accounting standards and auditing norms at all listed and large unlisted companies, includes initiation of a probe into professional matters or misconduct of any member or a firm of chartered accountants. It also has the authority to impose penalties and debar a CA member or a firm. Several observers have opined that the move is a knee-jerk reaction which will add to another layer of red tape. The Institute of Chartered Accountants of India (ICAI), the self regulatory body for CAs, has opposed the formation of NFRA on grounds that it would not be prudent to draw any conclusion against the profession until the disciplinary inquiry is concluded in the PNB matter and the role of all those who acted in fiduciary responsibility was established. Factors Favouring NFRA Set Up The set up of the NFRA also indicates a lack of trust in ICAI to effectively address malpractices indulged in by recalcitrant members. Till now, the ICAI has had the monopoly on scrutinising audit quality and granting licenses to CAs to practice and regulating them. However, proponents of the NFRA argue that ICAI itself is to be blamed for creating a trust deficit, due to a failure to fulfil its oversight obligations. In spite of frauds after frauds such as Kingfisher, Satyam, Enron and Ketan Parekh being coming to light, ICAI continues to remain a cosy club of professionals chosing to ignore the blows dealt to its reputation by fellow members’ transgressions. According to government data, of the 1,972 disciplinary cases considered by the ICAI till now, only the auditors of Satyam have been permanently disqualified from membership. In all other cases, the guilty members have been merely reprimanded. Another factor which is in favour of the NFRA is the fact that over 50 countries across the world have moved away from self regulation and created independent audit regulators. Notable amongst them are the Public Company Accounting Oversight Board (PCAOB) in the US and the Financial Reporting Council (FRC) in the UK. There is a wider belief that self regulation works only up to a point and the market fails quickly in a self regulatory mechanism because of the inherent conflicts. Why Reinvent The Wheel? Notwithstanding the arguments in favour of setting up of the NFRA, the question remains why to reinvent the wheel when two empowered institutions, Reserve Bank of India (RBI) and ICAI – both of which are products of Parliamentary discourse – already exist to tackle bank scams. Isn’t it necessary to fix accountability on these institutions and also streamline them so that they perform their duties, for which they are meant, in a more responsible and efficient manner? The PNB fraud highlights lacunae not only in auditing but also in the enforcement of banking regulation. Had ICAI and RBI, the banking regulators, been tough and proactive, scams like this could have been detected much earlier. And, yet, both the institutions are comfortably protected in their ivory towers while the government is busy making a new body which might step over the foot of the Securities and Exchange Board of India (SEBI) which also has the oversight powers over audit firms of listed companies. Suggestions to Prevent Financial Fraud ICAI argues that while it can penalise individual CAs, it cannot act against auditing firms indulging in corrupt practices. Against this backdrop, a Delhi-based CA, Sandeep Sharma, advocates revisiting the CA Act to give some legal teeth to the toothless tiger so that it can act against its erring members. A paper titled “Frauds in the Indian Banking Industry”, which was published by IIM Bangalore has also listed several suggestions to prevent financial frauds. The report suggests that banks should employ the best available IT systems and data analytics so as to ensure effective implementation of the red flagged account and early warning signals framework suggested by the RBI. As evident in the PNB scam, a good technology system could have made it impossible or at least extremely difficult for Nirav Modi and Mehul Choksi to bypass controls. The paper also suggests setting up of special fraud monitoring agency by respective banks. This move will require banks to improve their human resource management policies and hire experts trained in fraud detection. Third, the regulator should design stringent measures so that CAs and auditors who figure in bank frauds are not able to get away with fraudulent financial statements. And for that, it is necessary to conduct investigations in a given time frame. The RBI should nip fraud in the bud by ensuring that rules are being effectively implemented by banks and in case of violation, it should take strong punitive action. In a radical use of technology to reduce fraud, Professor Jayanth R Varma of IIM Ahmedabad suggests the use of blockchain technology to make banking transactions more transparent. The technology would enable every link in the chain to be scrutinized publicly. The shibboleth of bank secrecy, Varma opines, should not be a cause for concern as borrowers themselves disclose information about large financing transactions in public statements. Wait And Watch Coming back to the NFRA issue, unfortunately, there have been instances in the past where setting up of agencies did not resolve an issue but only added up to files being piled up. The creation of the Serious Fraud Investigation Office (SFIO), post the Enron scam, to crack down on economic offences is a glaring example in this regard. There was no need to set up SFIO when SEBI and Excise and Customs departments were already there. The redundancy of the SFIO can be well gauged by the fact that as per an official data, since its formation in March 2007, the SFIO has investigated less than 100 cases and submitted less than 20 reports. Moreover, none of these cases was taken up suo motu. Nevertheless, it is too early to say whether the NFRA will able to prevent financial frauds or it will become yet another redundant agency. Till then, ‘wait and watch’ is the only option left with us!
Editor’s comment: In the wake of recent incidents of fraudulent lending and lack of managerial prudence, the banking system in India is in dire need of structural and policy reforms which would ensure greater transparency and accountability in the credit system. While introducing the Insolvency and Bankruptcy Code 2016 and creating a Bank Investment Company (BIC), to act as a bank-holding company to consolidate all government stakes in PSBs is an attempt towards improving bank governance; the creation of a secondary loan market will help in diversification of risk and mark-to-market valuation of credit, thus leading to greater transparency and data availability. Issues with bank lending standards and the lack of transparency with bank loans in India is a problem that has been evident for a while. Repeated incidents of lending malpractices tell us that creating transparency and liquidity in the bank loan market in India isn’t a choice but a necessity for the country. Transparency and liquidity, the two much-needed features can be created via a fully functioning and deep secondary market in bank loans in India. While this process will take years to complete, the government must start today. The fundamental problem with the absence of a secondary bank loan market in India is “moral hazard”. The problem of “moral hazard” leads to some lenders in banks making loans with little or no “skin in the game” with lower lending standards than ideal. To add to the problem, the bank that originates the loan holds on to the entire loan on its balance sheet with little or no transparency about the loan quality. Poor lending standards are encouraged and discovery of problematic loans is too late in the credit cycle. Invariably a corporate with poor credit can borrow from multiple banks, even as good quality corporates get crowded out of the market. Essentially, a bank loan market with little or no secondary market liquidity in India leads to aggregation of risk with a few banks and very little transparency on loan quality information. This is one of the major reasons for Non-Performing Assets (NPAs) and lending malpractices. Trading in bank loans to some extent is a must to resolve the issue of poor lending standards. A liquid and deep secondary bank loan market would go a long way in improving lending standards. The lender would have strict regulations in terms of how much of the originated loan they can hold on to their balance sheet. This would induce the lender to maintain higher standards of lending, since they will have to get other investors to partake in the loan eventually. This is where independent credit rating agencies will have to come in to assist investors in loans to analyse and rate the loans in question. This rating by the third-party rating agency will not only be on the credit of the corporate involved in the loan, but also on the actual loan covenants and collateral involved. A loan specific rating will assist investors to invest in loans made by banks. Such investors investing in the loans will lead to both higher quality lending a well as diversification of risk with each lender holding a smaller proportion of the total risk. The secondary market in bank loans should start with certain standardized loan formats that can be traded. Eventually the market needs to build on these standardized formats. Once the market gets liquidity, variants of the standardized loan format can be introduced. The aim of the market must be to create a “mark-to- market” for bank loans. In the more developed capital markets independent valuation agencies such as Markit provide month end pricing on loans. Indian policymakers will have to come up with measures such as month end pricing to begin the process of mark-to-marking loans to a secondary market price. This will create data transparency in the market and a demarcation of credit in terms of quality, assisting investors and lenders to gauge credit quality. The current situation of an opaque market with very little clarity on credit leads to poor lending decisions in a loose credit cycle and penalisation of good borrowers in a poor credit cycle, hence leading to economic losses both ways. Mark-to- market valuation of loans will also ensure that information is priced in by the market in a gradual way, instead of the sudden information spurts in the current situation. In summary, bank loans must be established as an asset class with greater liquidity. The three features of a standard asset class are a wide investor base, transparent pricing and some level of liquidity. A secondary market will help in diversification of risk and mark-to-market valuation of loans. Both factors will create transparency and data availability, therefore rewarding borrowers with good credit quality and penalising poor credit quality borrowers. A well drafted and effectively implemented secondary bank loan framework will go a long way towards shoring up the banking system in India. Originally Published in Financial Express
What is the India of 2018? What kind of nation have we become after seventy-one years of being in-charge? An easy response sits within a treasure trove of statistics – GDP growth, private investment, foreign exchange reserves, billowing billionaires, unicorn start-ups, average rise in standards of living etc. All to rightly assuage the worldly notion of progress. Observing any country’s development through a silo of macro and socio-economic indicators can be misleading. Recent events show we should resist the urge to constantly pat ourselves, and rather introspect on having created a system which brazenly reinforces inequities. That is the cost of our rise and if not checked, sooner or later, the nation would have to pay up. Inequities originate from inequality. The data from the likes of Thomas Piketty, Oxfam and Credit Suisse is clear. Some experts may disagree with their methodology so consider this simpler framework instead. Forbes Magazine just released its annual list of World’s wealthiest billionaires. 119 Indians made the cut with their combined wealth (amounting to $440bn) equalling a whopping 19% of India’s GDP, second only to Russia! The concentration could not be clearer. Source: Forbes and World Bank Data Trouble is that wealth disparity does not end at mere differences in quality of living but skews the very functioning of institutions which are supposed to view individuals as almost equal if not equal – be it the government, its enforcement agencies, regulators, judiciary, or the media. Before tagging me as cynical or alarmist, pause and ask yourselves a straight forward question. When was the last time a man of wealth ending on the wrong side of the law faced the requisite consequences in our country? By a man of wealth…mere “affluence” is not enough. I talk of the Big Fish. Someone who needs no introduction and often no context. I talk of the Forbes billionaire behind the earlier chart. The recurring winners of Indian Business Leader of the Year Award(s). Take a moment and think hard. You will struggle. The Nirav Modi saga does not count. Yes, his business empire and brand may have fallen, but any retribution of individual consequence against the perpetrator of India’s largest white collar crime seems unlikely. With rabble-rousing around UPA vs. NDA vs. regulators vs. bankers already at play and a media ready to gobble all bits, implicit support to “move on” are evident. Newer tributaries of the original scam, real or imagined, are thrown in the narrative (read ICICI, Axis etc.). A loose bill to deter economic offenders from fleeing the country gets tabled two years too late. Whether prime accused Mr. Modi and Mr. Choksi will ever face an Indian court is anyone’s guess. Their legal counsels will surely advise them against returning. Mr. Mallya’s precedent stands robust. This is hardly the exception. Be it wilful defaulters either corporate or HNWIs, unfair grant of contracts, irregular allocation of land and natural resources, breakdown of corporate governance – India clearly has differential standards of proprietary, morals, ethics, process, and judicial tolerance for the haves vs. the have-nots. After all the prime-time debate drama, the real delivery of justice against the former in most cases does not stand the test of time or efficacy. Having an absolutist view on equality is naïve. Even the United States suffers from a massive concentration of wealth. US corporate sector has had its own journey. Common Americans were forced to bail-out failing banks during the crisis. Companies spend billions to lobby Congress to move one way or the other. But the country also has over 240 years of institutional history, which means its rule of law still does not spare if you’ve crossed a certain line, regardless of who you are. They have a Bernie Madoff who is in prison till he breathes his last, a Jeffrey Skilling (Former CEO, Enron) who is serving a 14-year sentence, and a Michael Milken who went to jail despite being the “Junk Bond King”. All accused for white collar crimes, all extremely wealthy. Yes, we have progressed. And yes, we have done that as a functioning democracy. But our constitutional ideal of one man-one vote ends with the election. At all other times, we are governed by the wealthy.
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
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.
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.
The Indian Stainless Steel industry is the second largest in the world, next to China. It expects to grow at around 8-9% to achieve production of about 5.5 MTPA by 2022 from the present level of about 3.5 MTPA. Though positive policy support from ‘Make in India’ and ‘Smart Cities Mission’ is expected to provide the much needed impetus to the sector, the industry argues that custom duty on key raw materials is hindering its growth. The industry has been pushing the government for a level playing field. As Finance Minister Arun Jaitley gears up to present the Union Budget 2018 on February 1, the stainless steel industry has demanded that the government should remove import duty on ferro-nickel and stainless steel scrap – key raw materials used in the production of stainless steel. In a pre-budget statement issued to the media, president of the Indian Stainless Steel Development Association (ISSDA), apex industry body of stainless steel sector, KK Pahuja said, “It is absolutely necessary to preserve competitiveness of Indian Stainless Steel Industry at a time when government is building new trade relations with other countries and we appeal to the Finance Ministry to remove basic custom duty on both Ferro-Nickel and Stainless Steel Scrap.” ISSDA’s demand also finds resonance in the All India Induction Furnaces Association (AIIFA), the secondary steel industry body which also urged the government to remove 2.5% import duty on steel melting scrap in the upcoming budget. FERRO-NICKEL Nickel and ferro-nickel are among the main raw material to produce stainless steel. Since nickel is practically unavailable in India, the metal is imported, either in pure ingot or scrap form, from Indonesia and China. According to an estimate, India imports around 30,000-35,000 tonnes of nickel, in both the categories, annually. On April 1, 2017, government had abolished the import duty on nickel. However, ferro nickel, which attracts 2.5% tax, was not exempted. According to Pahuja, removal of custom duty on pure nickel did not help the industry much as most of the metal used by stainless steel makers is in the form of Ferro-Nickel. Nickel is used by the stainless steel industry to manufacture industrial and utensil grade materials. The cost of stainless steel production in India is directly proportional to the nickel prices and the amount of its use. STAINLESS STEEL SCRAP As per a Steel Ministry data, of the total 52 million tonnes (MT) steel produced through electric route in the financial year 2015-16, around 28 MT steel was produced from scrap. According to a media report, India imports around 7 MT of scrap which leaves with a need to internally generate over 23 MT of steel scrap annually. Against this backdrop, the ISSDA budget wish list released to the media states, “Since all stainless steel is produced through electric furnaces, stainless steel scrap is the main raw material which also provides cost effective source of alloying elements like Chrome and Nickel. The scrap is also not available in the country and has to be imported. Therefore, the custom duty for stainless steel scrap should also be made zero from current 2.5%.” DEMAND STIMULATION In spite of being the second largest producer globally, India is still a net importer of stainless steel and alloy steel used in high-end applications. Also, as per an ISSDA statement, the per capita consumption of stainless steel in India is 2 kg against the world average of 6 kg. Therefore, there is a huge potential for growth in this sector. According to Draft National Steel Policy 2017, the demand of steel, including the stainless form, will grow threefold in the next 15 years to reach a demand of 230 MT- 240 MT by 2030-31. However, stimulation of domestic demand will require adequate policy measures by the government and active participation by the steel industry. Construction and manufacturing sectors such as rural development, urban infrastructure, Railways and Roads and Highways are the key focus areas for stainless steel demand growth. As such, usage of steel in all buildings and structures needs to be encouraged and the overall cement : steel ratio in construction of buildings in the country needs to be reduced. The first step in this regard, experts say, would be to mandate greater use of stainless steel in government projects. According to a FICCI report on steel industry, to spike domestic demand, the government needs to increase steel usage in making railway station, foot over bridges, rail coaches, construction of steel based railway colony buildings especially in earthquake prone areas, construction of dedicated freight corridors and superfast rail corridors and construction of more steel bridges. It will not only boost domestic demand, but also save time and capital expenditure. Low steel consumption in rural areas is also an area of concern. According to the FICCI report, the current per capita steel consumption in rural areas is only 10 kg as compared to India’s overall per capita steel consumption of 61 kg. So there is a large scope for increment in steel usage in rural areas. According to industry experts, government needs to take special steps to sensitize the rural population about advantages of using steel in construction and create necessary infrastructure to ensure steel products reach them.
India seems to have left the worst behind, having tread uneven terrains and valiantly recovered from the reverberations of demonetization and roll-out of the Goods and Services Tax (GST) regime. The recently released Economic Survey asserts that FY18, with its muted growth of 6.5%, is a one-off and the country is on its way to structural recovery, heading towards a familiar 7-7.5% GDP growth the year after. With Finance Minister’s Budget Speech due in less than a day, all stakeholders - be it the industry, the investor community, and citizens across the spectrum - keenly await the government’s plan to execute a revival forecast by most commentators. The distinguished table of IMF, World Bank, Moody’s, WEF, and now our own Economic Survey agree on one point – India has been through its share of disruption, but all of that is behind us. But is it? The same Survey carries some grim messages. The threat of rising oil prices, subdued private and public investment, an overall drop in savings, and a general slowdown in both agriculture and manufacturing, the former thanks to stagnant wages and pricing pressures, while the latter courtesy the NPA challenge plaguing the banking sector. Side stepping one’s tendency to let negativity carry forward the narrative, let’s take stock of things which went well. The biggest economic event of the year happened on July 1, 2017 with the introduction of the GST. According to me that is also the biggest positive. Yes, it has translated into multiple rates and cesses with countless footnotes and exceptions regularly undergoing harmonisation, yes the technology platform is far from perfect, and yes it has led to a higher compliance burden especially for small businesses. But, bringing 29 states with wide disparities of economic development under a common umbrella of revenue accrual is no mean feat. Using input credits to counter double taxation and ensure compliance in a country where tax evasion is rampant will not go well with most. No one embraces change and it takes tremendous political will and courage to mobilise any. Previous governments may have envisaged or opposed the framework, but it is this government which has executed it. And this very act nullifies their precedent actions (which may have been against GST when they were in the opposition) as mere political role-play. Second positive is the wide variety of measures to tackle the Non-Performing Asset (NPA) debacle afflicting India’s banking sector, both in terms of the Insolvency and Bankruptcy Code (IBC) cornering defaulting promoters, and the recapitalisation plan relieving bank balance sheets. IBC is still a work in progress, jurisdictional confusion is prominent, there are double standards for treatment of some defaulters vs. the others, and recapitalisation sans adequate governance standards for both creditors and borrowers would at max serve as an ad-hoc solution. But for the first time, power dynamics are being re-aligned, courtesy a structured time-bound (albeit not perfect) process for resolution. Third big positive, I dare say, are the number of retail specific interventions – enhancing financial inclusion through Jan Dhan Yojana, with over 300m bank accounts as at Dec 2017 and a sharp reduction of zero balance accounts; over 74% coverage of sanitation facilities for rural households with high usage; a strong and real push towards affordable housing and crop insurance to name a few. These initiatives, directly and indirectly, have the potential to enable significant economic change and the government should rightly continue to iterate and execute, spot and resolve operational and policy gaps where required. Moving over to losses and lessons to be learnt – demonetization has been nothing, but hubris reinforced by political gains to be eventually muted by economic realities! Its narrative was mid-implementation amended from ‘an executive action to weed out black money’ towards ‘being part of a grander plan to steer to a Digital India’. Data from various agencies including the RBI only point towards its failure to tackle both. Yes, perhaps marginally more people refrain from using cash…but crediting demonetization vs. much simpler and piecemeal actions which followed (i.e. limits on transactions and withdrawal), is plain disingenuous. Such “bold” experiments, should they repeat in future, must pass tests of the most stringent nature before being tabled. With demonetization thankfully behind us, the most fundamental area of concern would be the sizeably reduced role of private sector industry (corporate, infrastructure, industrial) and agriculture within India’s economic performance, both in absolute as well as proportional terms in recent years (e.g. as share of GDP or GVA growth). The economy has been chugging on wheels of consumption and public expenditure, which is not sustainable. The slowdown in private sector industry has a spill-over effect resulting in reduced investment, muted exports, and diminished demand for imports. Part of it may be driven by a locked credit cycle on which the government is already working (i.e. via IBC and bank revival), but the other part is more structural and demonstrates the failure of schemes such as ‘Make in India’, and inability of the system to facilitate land and labour acquisition and capital access. The government’s spending focus on road building, ports, electrification etc. are noteworthy, but they don’t represent a bottom-up improvement in manufacturing capabilities and competitiveness. While rural India is surely on the radar, courtesy the government’s successful social-economic drives, agriculture needs to be the second area of focus. Reducing dependencies on monsoons (only 35% of cropped area under irrigation), increased access to farm credit, improving crop price competitiveness to reduce wage stagnation, are big problems to solve – each appropriate to go through an accelerated ‘cooperative federalism’ mobilisation, the akin of which we saw in GST. A comprehensive review of the above is expected and perhaps warranted from tomorrow’s speech.
Editor’s Comment: 2017 has proven to be a mixed bag for the Indian Economy. Doomsday stories circulating in the aftermath of demonetization and GST took a narrative turn with India jumping 30 places on World Bank’s “Ease of Doing Business” Rankings to enter the top 100 club. With the GDP numbers looking better at 6.3% vs 5.7% in Q1 and Moody’s rating upgrade, India's perception to say the least is on the right track. However, it remains to be seen if Ease of Doing Business translates into "Ease of Living" for the common public. As elections near in multiple states, Narendra Modi has reasons to smile. The opposition which was finally gaining ground attacking the government on its two key economic reforms – demonetization and GST, was struck down by the twin blows – a massive 30 rank increase in Ease of Doing Business Index and the recent Moody’s India upgrade. The ruling party was quick to capitalise on these improvements and has likely succeeded in covering the scars of demonetization and GST implementation woes. The PM promptly highlighted that an improved ranking not only benefits businesses but also common lives. Speaking at a conference, “India’s Business Reforms", along with the World Bank CEO, Modi said that ‘Ease of Doing Business leads to Ease of Life’. How true is this claim? The World Bank, in its Ease of Doing Business index calculation, takes 10 indicators into account. These indicators are – starting a business, dealing with construction permits, getting electricity, registering property, getting credit, protecting minority investors, paying taxes, trading across borders, enforcing contracts, and resolving insolvency. Some of these indicators are equally important for the common man as they are for a company. For example, the ‘Getting Electricity’ indicator, where India has made steady progress from 137 in 2015 to 29 in 2018, depends on the number of power outages, prompt notification about planned outages, compensations in the case of outages, prompt communication about tariff change and the professional handling of installation and maintenance. The World Bank questionnaire further includes the ease of getting a right-of-way clearance, and on who is responsible in case of an incident related to faulty internal wiring. It’ll be interesting to note that the average time to obtain an electricity connection in Delhi is 45 days as of World Bank 2018 data, which is more than 20 days less than the average in OECD high income economies. Two areas where India made big leaps are Paying Taxes Index and Getting Credit Index. In Paying Taxes Index, India leaped 53 places, from 172 to 119, whereas in the case of Getting Credit, it moved from 44 to 29. The improvement in Paying Taxes Index was attributed to the increasing penetration of digital mechanisms. The World Bank study was conducted before GST; hence the impact of GST is not reflected in the 2018 rankings. The ability to pay and file taxes online was a key measure of how the state is doing in this area. Without doubt, the ongoing process digitisation, not just limited to tax filing, has saved the time and effort for both companies as well as the common people. Similarly, an improvement in the credit availability is a positive sign for not just the companies, but the general public as well. However, there are parameters where India continues to do below par. In the registering property indicator, India has slipped from 139 to 154. The indicator takes into account the reliability and transparency of the property registration system, cadastral/mapping system, legal system, dispute resolution mechanisms and equal access to land. Any improvement in these areas is beneficial not just to corporates, but to the general public as well. The equal access to property rights index takes into account whether married/unmarried men/women have equal ownership rights over property. While it is understandable how this can influence Ease of Doing Business - it also serves as an indicator of the state of progressive rights in our country. Land record keeping has always been a messy business in India, however new solutions are emerging. Telangana government is already using blockchain technology, the same technology that powers cryptocurrencies like Bitcoin, for maintaining digitised land/revenue records. Such progressive measures will simultaneously improve general public life and the Ease of Doing Business Index. Does the improved Doing Business Index indicate a better future? The upbeat waves within business circles after the jump in Doing Business Ranking is under the hope that this warrants a better future. India has been struggling from severe unemployment issues with predictions that the manufacturing sector will see 30-40% reduction in jobs in a year. The Modi government expects the 30 places jump to send signals around the world that India is becoming more business friendly. The government expects increased FDI as a result, leading to the creation of adequate well-paying jobs which will Ease the Life of struggling youth. Ultimately, the enthusiasm shared by the general public about India’s jump is under the same belief that it will bring in more capital and subsequently, employment into India. However, examples around the globe do not point to this conclusion. In the last 10 years, the biggest leap in Doing Business Rankings was made by Rwanda, which improved its ranking from 139 to 67 in 2009-10 period. Rwanda has continued to increase its ranking and is currently at 41. It is interesting to note that FDI – Net inflow as a % to GDP fell from 2.21% in 2009 to 0.73% in 2010. It has subsequently risen and as per the latest figures - stands at 3.04%. Azerbaijan also made such a leap, where it climbed 63 points from 96 in 2008 to 33 in 2009. FDI Net Inflow as % of GDP fell from 8.16% in 2008 to 6.5% in 2009. Source: World Bank Amongst the top 10 achievers in Ease of Doing Business Rankings, 7 actually slipped in terms of FDI Net Inflows. Clearly, improving Doing Business Rankings has not helped these countries attract Foreign Direct Investment. In fact, data shows that majority of them have become worse off. Montenegro, a country which improved its ranking by 46 places, shows an FDI inflow decrease by 17.6 percentage points in 2006-16 period. Source: World Bank The country’s Ease of Doing Business index does not seem to reflect economic growth either. 5 out of the top 10 achievers in Doing Business rankings has an average growth rate of under 3.2. These countries, despite improving their rank by over 40 points have been unable to justify the impact with their economic growth. This too, is not a good indicator for India which is celebrating its 30-place rise in Doing Business rankings. However, these statistics have to be taken with a pinch of salt. None of these 10 countries are in any way, comparable to India. While it may be possible that investors turned a blind eye over the achievements of these smaller economies, it would be hard to think they would do the same with a $2.26 trillion economy. Hence, it would be amateur to write-off India’s Doing Business achievement as a paper victory. The world has noticed India’s accomplishment. No other country has improved as much as India did in the last one year. Furthermore, the jump has helped India crack the Top 100, which may have its psychological effect as well. The Doing Business rankings, combined with the Moody’s ratings increase, are indicators that India is moving in the right direction. But whether the public will benefit from these is yet to be seen. Co-written with Sravan J S, XLRI Jamshedpur
The conflict of interest charge on ICICI and the Kochhar clan has only added another layer to the crisis afflicting the banking sector in India. The allegation, stripped of all embellishment, is simple. Did ICICI Bank go wrong in lending to a counterparty when its CEO’s spouse had an ongoing business relationship with the same? Can the same CEO’s extended family (i.e. brother-in-law) advise ICICI’s debtors? It is not a matter of legality which I’m sure any killer attorney would argue against. It is a matter of propriety which comes with a high office. And being CEO of one of India’s largest private sector (also listed) banks is a sufficiently high office. As the top management officer appointed by the Board and by extension the shareholders, the onus is on you. Financial institutions are familiar with the concept of “conflict checks”. Any global investment bank would conduct them to ensure they (or their subsidiary/branch) are not advising on the opposite of a transaction, or do not hold a significant trading exposure, before accepting a mandate to advice a client on say a M&A situation. Such mechanisms should naturally apply to senior management, especially for an organisation like ICICI – not promoter owned/controlled but widely held by institutional investors including big mutual funds and foreign bodies. What disclosures are the likes of Mrs Kochhar supposed to mandatorily make regarding her family and extended family’s business interests? At what frequency? How is that being recorded and monitored? How is this information actioned upon within the company’s compliance function? Should the Board wait for investigations to conclude before taking any concrete actions? Corporate officers should be held to the same standards of scrutiny and probing usually reserved for public servants/politicians. Just as the latter is held responsible for tax payer’s money, the former is answerable to stakeholders. They naturally carry the burden of reputational risk for the organisation they represent and shareholder value will continue to erode till uncertainty looms, either around their own actions or their future with the company. That is why the Board expressing support (even informally) for the CEO when multiple agencies are kicking off investigations is premature and irresponsible. That is why Chanda Kochhar should have resigned or been asked to step down by now. Deepak Kochhar (Chanda Kochhar's husband) in an interview with India Today argues, “Where is the conflict of interest? ICICI Bank will have relationship with all top corporates in India. If I can’t touch any corporate who deals with ICICI, is it fair to me? Can I function like this? I am a Bajaj MBA and a Harvard alumnus. I am an educated professional. Should I sit at home just because my wife is CEO of ICICI Bank?” When your wife is the CEO of one of India’s Systemically Important Banks which can tap global capital markets as it pleases, you should touch very carefully. Full disclosure: I have a savings and current account with ICICI Bank which I do not intend to shut down in light of recent events. They don’t ask me to come to their branch each time I change my address, which in itself is priceless.
India’s e-learning market, according to KPMG, is the second-largest after the US and likely to grow to USD 1.96 billion by 2021. Over last two years, the online education sector in India has seen several big-ticket investments from global players such as Bill and Melinda Gates Foundation, Google, Netflix founder Reed Hastings, Chan Zuckerberg Initiative, Bertelsmann India and Kaizen Management Advisors. The future of the e-learning market in India appears bright. However, at the same time, the sector is fraught with several challenges like the absence of proper digital infrastructure and lack of standardisation of online programmes amongst others. A television commercial highlighting parents gleaming with pride when they watch their children learn concepts of Mathematics and Biology through an educational mobile app best describes the paradigm shift in the Indian education sector which has come a long way and is no longer bound to just classrooms. This changing landscape is expected to grow the paid user base of India’s e-learning market by six times to 9.6 million users by 2021. The sector can balloon up to USD 48 billion by 2020. Growth-Drivers Low education coverage, growing mobile and internet penetration, increasing government participation, the growing need to re-skill professional fields and convenience are some of the key factors that are spurring the growth of e-learning in India. In a welcome move, the Modi Government is also formulating policies related to technology adoption and online education delivery infrastructure to extensively incorporate digital literacy in India. The opportunities and the Government support via Digital India and Skill India programmes have seen a huge momentum in the growth of online education sector in India. So much so that in the last two years, the sector, which is estimated to grow as big as e-commerce in the country, has drawn marquee investors from across the globe. With approximately USD 240 million investments in its kitty in the last two years, Bangalore-based e-learning start-up BYJU is a leading example of the global market’s interest in this sector. All Is Not Well However, in spite of the seemingly positive environment, there exist several challenges in the online education sector in India. “The lack of access to Internet Infrastructure has been a major nagging issue for the sector,” opines Vipin Aggarwal, Chief Executive Officer and co-founder of an online education platform, OnlineTyari. Even as the Indian Government is making efforts to improve the digital infrastructure across the country, the World Economic Forum (WEF) reveals that the majority of India lacks the required digital bandwidth. As per the WEF, only 15 out of 100 households in India have access to internet. With only 5.5 subscriptions for every 100 people, the mobile broadband also remains for a privileged few. Also, the broadband reaches just about 600 corridors, that too in the top 50-100 cities, leaving the rural areas with dismal net connectivity. Added to this, frequent power cuts and voltage fluctuations causing network issues in rural and semi-urban areas are an impediment to deeper penetration of e-learning in India. Another major problem, experts feel is the lack of standardisation, credibility and quality of online programmes. Experts point that since e-learning players offer multiple courses on the same subjects, the curricula of which are designed and imparted by different instructors, the quality of courses may vary across different online learning platforms. Also, due to lack of definite Government guidelines, most of the online courses are either not considered credible or are not recognised in the traditional educational ecosystem. Lack of proper infrastructure is also impeding the digital growth of education. As Professor Dinesh Nair of Mumbai University explains, “There has to be a definite government policy in place. Technology should be readily available in schools, colleges and institutions of higher learning.” Also, in India, cloud-based learning solutions are not being readily used. Cloud-based solutions enable new reading material to be made available to people on the go rather than “loading” computer systems with very heavy learning management software. Updating cloud-based systems and changing the training content can be done centrally and much faster. Experts also feel that there is an issue with the language of the online courses. Most of the online courses focus on English content and as a result, non-English speaking students who come from non-urban areas struggle with the availability of vernacular content. Another challenge is the reluctance of a section of teachers to be trained in using e-learning tools as they feel that “these disruptive technologies will replace them permanently”. Experts also express concern on lack of face-to-face interaction in e-learning. They feel that since online courses are self-paced learning, there is poor student-teacher and peer-to-peer engagement which in many cases result in negligible motivation leading to their low completion rates. The Path Ahead There is not an iota of doubt that online education has a promising future and is on its way to becoming the next sunrise industry in India. However, as Aggarwal says, “To improve the digital education sector in India, the Government needs to create a system that should encourage multilateral participation of private and public sector players thus relying on more tech-enabled solutions and involving more experts in creating the pedagogy and rolling-out solutions for the masses.”
In the past decades, US economic growth has been achieved by driving down costs through outsourcing and by keeping wages low through globalisation. A harsh lesson learnt during the 2008 crisis was that lowering costs alone cannot fuel the economy. In May this year, manufacturing’s share of employment in the United States fell to 8.48%, the lowest ever since the Labor Department first began keeping records in 1940. In a recent article (“Why US big business listens to Bernie Sanders”) CEO of General Electric, Jeff Immelt opined that one could learn from the German Mittelstand. Germany was the world’s second largest exporter in 2016. Its export of products and services accounted for more than one third of its national output. In the last 20 years, Germany is the only OECD nation that has held on to its proportion of world trade, while US’ and Japan’s share of the pie shrank. What is Germany doing right? The answer may lie in its Mittelstand companies. “Mittelstand” means medium-sized companies but the term is generally used to refer to Small and Medium Sized Enterprises (SME) which are family owned, or operate with a family-like culture. Their output makes up approximately 68% of Germany’s exports and is the “backbone” of its economy. Mittelstand companies have established themselves as global leaders in many niche areas, and have strong export markets. Examples include lesser-known brands Flexi in dog leashes; 3B Scientific in teaching equipment; Klett in textbook publishing; Playmobil in toys, Staedtler Mars in writing equipment; Sennheiser in audio equipment; and Miele in white goods. We studied what makes Mittelstand so successful: Family business-orientation: Mittlelstand companies are focused on the long term. Financially conservative, they generally do not list on financial markets. Though recently some firms have started to raise capital through issuing bonds, generally, they rely on retained earnings and bank debt. They are community-based; their HR policies do not include a hire-and-fire strategy but instead focus on building skills in their employees. The smaller companies tend to keep their production facilities in the locale where they started, while setting up sales and service centers globally Global niche dominance: Mittelstand companies share the same national trademark values of performance, reliability, safety, durability and design. They pride themselves as solution providers rather than just producers of products or services. They cater to small niche market segments, on a worldwide basis (“two-pillar strategy”), avoid industries requiring high levels of capital outlay and eschew competing against large corporations Strategic geographical position: With Germany sharing borders with nine countries, Mittelstand gained huge benefits from the unification process and porous customs arrangements. Its strategic position between Asia and the Americas also gives it the advantage of shorter travel times and accessibility of communication Strong educational ties: Mittelstand is supported by a nation-wide culture of education, basic research and technology transfer. This is implemented via a structured and pro-active approach to produce a supply of well-trained vocational manpower—Fach Hochschule (FH) and Technische Hochschule (TH) produce strong vocational training graduates (equal in status with varsity graduates); technology transfer is enabled by research organisations like Fraunhofer; while basic science is promoted centres like Max Planck institutes Technological leadership and innovation: The foundation for these firms’ market success is products and services that often define the state of the art in their respective markets. They stay cost competitive via continuous investment in advanced production methods and ongoing R&D through collaboration with research institutions Strong government support: The German government plays an important role too. Kurzarbiet is a work subsidy mechanism whereby employees get about 80% of their pay while working half time. This is especially useful in an economic downturn. The German tiered banking system has as its third pillar, small cooperative banks which are owned by their members. These banks operate on a mutual guarantee basis, are subject to a regional principle and are the principal source of Mittelstand funding. The German Chambers of Commerce Abroad, present in 130 locations, supports Mittelstand companies in their search for global markets Other countries have tried to emulate the Mittelstand model. In 2012, Spain’s youth unemployment rate was more than 50%; it had 1.5 million university students and only 270,000 trade school students. Its Education Minister signed an agreement to bring Germany's “dual system” of vocational training, which combines classroom instruction with work experience, to its youth. Similarly, the Confederation of British Industry wanted Britain “to have its own version of the German Mittelstand”. Even when President Trump’s meeting with Chancellor Merkel did not go well, he still found common ground in praise for the Mittelstand. Via a programme called Skills Initiative, German and American businesses and local education providers were brought together to develop training programmes based on business needs. Successful implementations have been recorded in the Greater Charlotte area, Michigan, Tampa Bay, Georgia and Wisconsin. Large German companies like BMW also participated. Nevertheless, such efforts are by no means sufficient in scale; they are also not designed to deal with challenges such as high drop-out rates from US schools and the preference for college degrees. Besides, the success of Mittelstand companies’ stems from more than its training programmes. Many other factors — the culture of a family-run business, niche specialisation, export-orientation and the availability of government support — are what make Mittelstand successful and sustainable. Unless American can emulate these as a package, Mittelstand may not be what it takes to make America great again. Co-written with Subrata Chattopadhyay Banerjee, Research Associate at Centre for Business of Culture, Nanyang Business School. Originally Published in The Business Times
With the Indian payments ecosystem already unnerved by a volatile regulatory regime and incessant government meddling, all hell broke loose when WhatsApp released its Beta payments feature in its highly popular messaging app last week. Home-bred, but Chinese-backed Paytm took the lead with founder Vijay Shekhar Sharma accusing the Facebook-backed incumbent of “killing beautiful open UPI system with its custom close garden implementation.” Interestingly, WhatsApp has managed this break-through only after a failed effort last year wherein its attempt to enter the digital payments space in India in partnership with a private bank was pulled up by the Reserve Bank of India (RBI). The narrative however took an interesting turn in the aftermath of demonetization when the government pro-actively sought to promote the Unified Payments Interface (UPI) in a push to digitize the economy under the Digital India program. UPI is a real-time payment system developed by National Payments Corporation of India (NPCI), launched in August 2016, facilitating instant inter-bank fund transfers on a mobile platform. The system currently hosts around 71 banks, expediting over 152 million transactions in January. With big names like Google Tez and Paytm jumping onto the bandwagon, the digital playground of payments has expanded exponentially in the past couple of months. Now with the ingress of WhatsApp along with its colossal user interface of more than 250 million in India, the payments arena is set for another disruption. According to media reports, WhatsApp’s payment interface has been rolled out in a phased manner, in order to enable both the application and the banks to gauge the extent of use and potential traffic. While it currently has a tie-up with ICICI bank, the payment gateway seeks to expand its partnership to SBI, Axis, HDFC too. This is in itself suggestive of the magnitude of the project. A prominent contention against the feature is that it doesn’t require a login session, unlike other platforms like Paytm or Tez. This poses a threat to the user’s sensitive data. NPCI has been accused of being biased to the global player in granting it exemptions which were not allowed to its counterparts. NPCI, however, was quick to respond to these allegations asserting that the application will be permitted full scale public launch only when it fulfils the guidelines laid down by the authority, i.e., incorporate wallet interoperability, generate BharatQR codes and have both intent and collect payment options. Integration of a payment ecosystem with a messaging application is exemplary of the changing frontiers of India’s financial architecture. A single platform catering to multiple user demands only enhances the user experience. For instance, Paytm, which started off as an e-payments platform has in less than a year expanded its services to being an e-commerce website, a bank and a lending platform. Such integration promises a wider customer-base – evident from WePay’s success in China. Alipay had dominated the Chinese payment market for years until the launch of WePay, the payments arm of WeChat. WeChat was initially launched as a messaging app ‘Weixin’ in China in January 2011. Over the last 7 odd years, it has become the one-stop solution for its customer needs – integrating a widely-used messaging application with the most commonly used applications and services such as booking tickets, online shopping, paying for groceries – basically all services a user would want in a day. In addition to this, introduction of the payments feature in an otherwise free application, will enable WhatsApp to effectively monetize its existing business model, increase customer retention and develop a sustainable revenue model. Is then the launch of a beta version a warning knell for other players in the industry like Paytm, MobiKwik, Tez, Hike? Will this bring about an overhaul in India’s payments ecosystem, engulfing smaller, in particular domestic players? India currently has a considerable number of local players in the digital payments arena such as Paytm, Hike, Freecharge and PayUMoney. Additionally, some banks have launched their own payment apps such as Ping Pay (Axis Bank), Buddy (State Bank of India) and PayZapp (HDFC Bank). It is amidst this chaos that the Indian government announced the launch of its home-grown app BHIM. Another blow was the launch of Google’s payment’s app Tez. With little headroom, the digital payment space is a tremendously competitive one and it is only justified if the smaller players feel threatened with the influx of global players like WhatsApp and Tez. Even BHIM, which was launched by the Prime Minister saw a sizeable dip in volume post the arrival of Tez. According to media reports, BHIM’s share crashed to 6% in December 2017, from a 40% share in terms of volumes during January-August 2017. However, it needs to be duly noted that while WhatsApp is restricted to peer-2-peer transactions as yet, others like Paytm, MobiKwik and Google Tez already have merchants on their platforms. Thus, while WhatsApp can leverage upon its existing customer-base, other players have the benefit of a head start. It then remains to be seen what course the industry intents to take. As is well known, most new industries, often fragmented, progress through a consolidation phase – a consolidation, much akin to the one witnessed in the ride-hailing industry in India, wherein Uber and Ola, the prominent players subsumed the smaller ones like Meru, Mega Cabs etc. The government on its end can either follow a protectionist regime like China, safeguarding its payments architecture and restricting the players to the local ones like Alipay, WeChat etc. or lay down a regulatory framework which would ensure that there is a level-playing field available to all contenders. It must simultaneously ensure that the customer’s data is secure and protected from any cyber threat in this increasing evolving digital arena.
Be it India's first electric superbike Emflux One, Lohia Group’s three wheeler Comfort E-Auto, Ashok Leyland’s Circuit S bus powered by a smart battery, Scandinavian start-up Uniti’s futuristic 5-seater electric car or auto giant Mercedes-Benz’s Concept EQ, it was the electric, zero-emission vehicles which stole the show in this year’s Indian Auto Expo which concluded on February 14. The marked shift towards vehicles that run on eco-friendly technologies could not have been more perfect with the Narendra Modi Government pushing for an all-electric fleet of vehicles to ply on India’s roads by 2030 – a part of its commitment made under Paris Climate Accord to cut carbon emissions, and to curb spending on oil imports which is estimated to shoot upto $300 billion by that year. Though the auto industry across the globe is gearing to walk the talk on electric mobility and power utility in India, the path is riddled with various challenges, albeit among several opportunities. Tamo Racemo Tamo Racemo PARADIGM SHIFT: START-UPS TO TAKE THE CENTRESTAGE As the ball sets rolling to achieve the target of all electric vehicle (EV) fleet by 2030, experts say that the Indian auto industry will witness a tectonic shift with start-ups or small players taking a centre stage in the sector. This was well evident in the recent Auto Expo where Bengaluru-based tech start-up Emflux Motors and Swedish auto start-up Uniti stole the show with their e-bike prototype and 5-seater electric car, respectively. As per an estimate, India’s total EV fleet, including two-wheelers, would grow to 144 million from under 1 million by 2030. ATTRACTIVE PROSPECT FOR ENERGY FIRMS According to US national laboratory, Lawrence Berkeley National Laboratory, EV expansion in India “will deliver economic benefits, help integrate renewable energy, and significantly reduce imports of foreign oil”. A recently published Berkeley Lab report, "Techno-Economic Assessment of Deep Electrification of Passenger Vehicles in India", states that the generation of electric demand from EVs can bring $11 billion a year in revenue to India's financially strapped power utilities, which is “enough to cut the sector's financial deficit by at least half”. The added power demand, the report states, “could also help smooth the transition toward renewable energy as the country strives to add 100 gigawatts of solar and 60 gigawatts of wind by 2022”. END OF OIL DEPENDENCY EVs could also spell the end of the internal combustion engine, thereby ending the dependency of oil for India’s transport sector. A Niti Aayog report suggests that EV adoption could save $60 billion in fuel costs. This would also aid in cutting down as much as 1 giga ton of carbon emissions by 2030. At present, India depends on foreign imports for over 80% of its crude oil supply. Switching to electric cars in India, the Berkeley Lab report predicts, “would substantially lessen that dependence, reducing consumption by 360 million barrels annually, or 15% of the total, by 2030. That translates to an annual savings of $7 billion (INR450 billion) a year, assuming a conservative crude oil price of $40 per barrel.” TVS Creon THE SPEED BREAKERS While the flurry of opportunities and positive developments in the EV market is a cause célèbre for India, there are some speed bumps in the policy landscape which is a cause of concern. The main hiccup is the charging infrastructure and policy in India. India reportedly has only 350 charging points at present as against 215,000 installed in China at the end of 2016. According to a media report, India will need nearly 300 charging stations in an area of 3 km once EVs become mainstream in the country. However, at a time when charging infrastructure is the need of the hour, unfortunately the regulations for electricity sales in India does not allow private players to set up charging stations. Under The Electricity Act 2003, only power distributors can offer electricity in the country. Although there are some private charging stations in Mumbai, those are run by Tata Power, which is already a power discom. Also Ola has set up a charging station in Nagpur but it is not wholly privately owned. The home grown cab aggregator has set up the charging station in collaboration with the State-owned Indian Oil Corporation. JBM Solaris EcoLife Observers opine that given the huge number of charging stations required and the mammoth investment required for their set up, there is an urgent need to amend the Electricity Act 2003 to allow private companies get into the public power storage. At present, INR25 lakh is the cost of setting up one charging outlet. Recently, Managing Director of state-run Energy Efficiency Services Ltd, Saurabh Kumar, had also advocated for petrol pump-like charging infrastructure, managed by public-private partnership or the private sector, to promote e-mobility in India. In fact, a Central Electricity Authority (CEA) committee set up by the Government to suggest ways to develop EV charging infrastructure in India has recommended that public EV charging by private entities should be allowed after comprehensive review of the existing laws and regulations. CEA is the apex policy advisory body in the power sector. The panel, it is learnt, has also suggested the Government to adopt a franchise model for setting up charging stations as an interim arrangement till the time the Electricity Act 2003 is amended. Another policy hurdle is the requirement of distribution licence to distribute power from respective State Electricity Regulatory Commissions (SERCs). Experts opine that given the number of regulators involved, a pan-India license would make a perfect sense. Apart from policy issues, availability of Lithium – required for making batteries for electric vehicles – is another major issue facing the industry. India does not have any Lithium deposits and it neither a manufacture lithium-ion batteries. Most of the Lithium reserves across the globe are controlled by China, Japan and South Korea. India does not manufacture lithium-ion batteries. Experts feel that since India needs to get into battery manufacture soon to realise its mission of all EV by 2030, it must secure the supply of Lithium from countries like Australia, Chile and Congo. Recently, the Government has suggested commercial use of ISRO’s Li-ion battery technology for EVs under the ‘Make in India’ initiative. The development is indeed commendable, however, at the same time, experts feel that there is an urgent need for India to invest in R&D around battery making, including in alternative technologies, because ultimately whoever controls the battery will control the EV domain. THE WAY FORWARD EV is a great opportunity for the industry and its future in India is undoubtedly bright. However, a convergence of government policy and upgrading charging infrastructure is what the country needs at the moment so that it can achieve a measure of success and does not miss the bus in the electric vehicle space in 2030.
The 14th Auto Expo kicked off with a majestic display of concept models, racing machines, hybrids and much more. The spotlight however shone bright on Electric Vehicles (EV) in all major segments. With the Minister of Road Transport and Highways Nitin Gadkari pushing for a sustainable and eco-friendly transformation of the country, India envisages a complete shift from a conventional, fuel-based model to EVs by 2030. Honda Sports EV Concept Toyota FCV Plus Concept Something which distinctly caught my attention was that aside from the usual suspects of sedans and SUVs on display, which are pretty much expected categories in the auto sector both domestic and international...there was an impressive range of mass market and high performance 2-wheelers. The one machine which really stood out magnificently amongst others was Emflux One – an electric superbike, Made in India by Emflux Motors. Emflux One “Emflux One wants to shatter the perception of EV as a boring, tame, low-performance, and flimsy machine”, says Varun Mittal, CEO and Co-Founder. Emflux One 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 for electric vehicles in India, 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. Intelligent Bike The super loaded machine, to be priced at around INR6L-INR11L (subject to add-ons), guarantees efficient battery to wheel power utilization and a pure riding experience. It additionally claims to achieve a significant drop in operational costs and most importantly a substantial reduction in CO2 emissions. The machine is a limited edition offering, with only about 200 units expected to hit the domestic market from October 2018 onwards and 300 units planned for exports. The team is however working towards a mass-market model with similar specifications. Emflux One is developed by a team of 25 led by Varun, an alumnus of IIT Delhi and ESCP Europe with previous work experience at two $100+ million start-ups, African e-commerce player Jumia & Indian hyperlocal auto aggregator Jugnoo. He was joined by his co-founders – chief designer Vinay Raj Somashekhar, former designer at TVS Motors and head of operations Ankit Khatry, former launch manager at Jugnoo. The Bengaluru-based company takes much pride in being one of the pioneers to have set up an indigenous development base – including tech for motor, controllers, battery management system, and charging station. Therefore, unlike other domestic counterparts, which greatly depend on original equipment manufacturers (OEMs) to procure most of their parts, Emflux boasts of a in-house ecosystem, equipped with an advanced Research and Development capability and a cutting-edge mechanical and aesthetic design. In future, they seek to simultaneously cater to the demands of both OEMs and the individual customers. “Emflux was founded with the mission to empower 10 million electric two-wheelers in India by 2027 with our two-pronged market focus - firstly build brand and loyalty by producing high-performance electric motorcycle and secondly create an ecosystem of the partner mass market two-wheeler manufacturers to whom we will become the technology supplier”, says Varun Mittal. According to industry reports, the demand for premium motorcycles (>250cc) in India has demonstrated a strong annual growth of 37% over last 10 years, expected to go up to 54% in the next five. Considering it is the fastest and most profitable segment in 2-wheelers at large, its transition to electric is only natural. An elementary problem which arises when dealing with EVs is the non-availability of charging infrastructure in India. While there are ad-hoc stations e.g. in select cities such as Nagpur and Mumbai, the system lacks a structured, pan-India setup. To add to this, India’s electricity regulator does not permit private parties to re-sell electricity without a distribution license or a public-private partnership with state utilities. Such rules need to be amended to ensure players such as Emflux can create the backend to support their riders' charging requirements or eventually diversify into provision of electric vehicle charging infrastructure to vehicles manufactured by third parties. With an improvement in the electric vehicle charging infrastructure in India, it is likely that more players shall enter this segment. Government must ensure that the right ecosystem is set up to support penetration and sustenance of EVs in India, including allowing private companies to set up electric vehicle charging infrastructure in India and re-sell electricity. As evidenced by this year's Expo, more specifically through start-ups like Emflux, entrepreneurs are hungry and innovative enough to bring exciting products to the market. With such extraneous factors in check, the country is set for an Electric Revolution.
The Mahabharat is one of the oldest and longest Epic poems in the world. The influence of the sacred text on Indian culture is deep and profound. Though the central story is that of the “Great War” and the circumstances that lead to it; it contains enormous life lessons all along. Bhagavad Gita, one of the most revered texts among Hindus, is also a part of the Mahabharat. Here we dig into this holy epic, unearthing some valuable investment lessons.
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.
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.
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.
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.
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?
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.