We like to talk Business and Finance. Figured we should do it for a living. Join us as we chat on three of this week's key stories.
Yesterday, several mainstream news outlets reported that Flipkart is progressing towards buying an unknown stake in Hotstar. While the reports are largely speculative and unsubstantiated, there might be some merit in assessing this grapevine, nevermind its far-fetched nature. First things first, the attractiveness of Hotstar within the Indian OTT marketplace is hardly refutable, as I have alluded to in a previous post. It is a fast-growing front runner in the Indian Video-On-Demand (VOD) space. Live sports and key content rights have helped drive robust growth in subscribers to over 75mn in a trice. A heightened risk profile emerging from meaningful reliance on third-party programming might be the only loose end in an otherwise high quality asset. So Why Would Flipkart Be Interested in Hotstar? The rumored investment appears to be broadly in-line with recent industry-wide M&A activity. As such, Flipkart-Hotstar comes across more as a play right out of Amazon’s playbook i.e. use video as a pull into the core e-commerce business. However, there are nuances. First, Amazon did not purchase Prime Video but built out its video business. Amazon’s Video play is centered around its multi-faceted membership programme aimed at creating an extensive eco-system in which Prime Video is just one of the several moving pieces, albeit an important one. In that context, a stake in Hotstar is hardly a parallel. An equity investment in video platform does not really suggest an entire eco-system play but rather a strategic long position in a high quality asset with a promising growth outlook. Second, if the objective is to create a membership play akin to Amazon’s Prime Membership where content and e-commerce services are bundled in together, then unless it is a majority stake or an outright acquisition, the investment as such seems like an overkill. The bundled value proposition can be created via partnership agreements. In fact, Hotstar already is one of the Internet partners for Flipkart Plus – Flipkart’s customer loyalty programme which competes with Amazon Prime. Third, the argument that Hotstar is a fantastic high-growth asset and Flipkart/Walmart want to take a bullish stance and in effect go long Hotstar appears far-fetched. While it might be logical rationale, it would make more sense if Flipkart were a private equity or an asset management firm notwithstanding the fact that Flipkart can very realistically make a profitable exit from the position via a secondary sale or even a potential Hotstar IPO in future. However, by that logic, tomorrow they could perhaps even buy stocks of Netflix and Amazon because they feel bullish about the underlying business. Flipkart is not an investment firm. All this leads me to believe that the key reason supporting Flipkart’s Hotstar chase is data. Perhaps buying stake in Hotstar is the only way for Flipkart to get access to consumer data that Hotstar hoards and continues to generate on the mobile device. Recall that about 90% of Hotstar’s watch time is on mobile and with 75 million subscribers on board, it is highly conceivable that there are several data points that could be of interest for Flipkart to understand consumer behaviour. This could potentially bode well for Flipkart’s underlying e-commerce business and subsequently uplift Flipkart’s membership programme. However, there is a caveat - to what level Flipkart can access Hotstar’s data library via an equity investment is debateable specially when size of the stake is unknown. However, all this is just one side of the equation. The other side is what makes the proposed transaction even harder to digest in my view. Why Would Hotstar Want Flipkart as an Investor? This is where things get blurry really fast. What is it that Walmart-owned Flipkart brings to the transaction other than just capital. Hotstar is owned by 21st Century Fox which itself is in process of getting taken out by Disney. In that context, would Disney/Fox even want Walmart to gain exposure to their prized Indian OTT asset? It is not an easy question to answer but it certainly makes the rumored transaction slightly perplexing. In my view, Flipkart ought to bring more than just capital to the table. First, Hotstar has Fox and Disney behind it both of whom have access to robust American capital markets in addition to fairly deep existing coffers. Consequently, Hotstar appears to be a well-resourced company. In fact, Hotstar recently raised INR 500+ crore from its parent. Second, why would Hotstar want to dilute its shareholders. The only plausible explanation I see in this regard is the case of a rich valuation that perhaps Hotstar can fetch. A valuation that exceeds what Hotstar possibly values itself might help it gain traction in future capital raises and more interestingly support the stock prices of Disney/Fox who can possibly argue that the true value of Hotstar is not reflected in their stock price. Third, the timing is puzzling. With Disney’s acquisition of Fox looming, how does Flipkart fit into the picture. Disney has its own video-streaming platform in the offing which will open up an interesting synergistic relationship with Hotstar anyway. So why does it need an India based e-commerce giant as an investor now? It is hard to believe that the cash injection will be the pivotal reason. Perhaps the only case that makes somewhat of intuitive sense is that Hotstar’s lumpy advertising driven revenue profile with the injection of some sort of recurring revenue arrangement from Flipkart will perhaps paint an optically positive picture from a monetization standpoint. Outside of that, the transaction as such appears to have more question marks than an intuitive fit. Having said that, the dynamic world of media has seen mysterious things and this is yet another interesting development, one worth keeping a close eye on. (We are now on your favourite messaging app – WhatsApp. We highly recommend you SUBSCRIBE to start receiving your Fresh, Homegrown and Handpicked News Feed.)
One of the poster worthy targets of the present government that has been recently announced is its intention to “double the income of farmers by 2022”. A number of schemes and policies have been put in place to make this happen - one among them is a commitment to increase the Minimum Support Price (MSP) so that farmers get a 50% return over cost. On paper, these are extremely good initiatives. However, I personally am wary of any generalizations. In the particular case of ‘providing a return of 50% over cost to farmers’, a number of questions immediately pop up in my head. How is the cost for farmers calculated - i.e. what are the inputs that are included? As a farmer, if I produce any crop in any amount, does the MSP policy guarantee that I will be able to sell all of it at a 50% margin? Who decides the MSP and how do I as a farmer sell at MSP? An increase in MSP is not going to solve a lot because it is an imperfect system. This is probably a good time to repeat the purpose of this column. This column is not written by an expert - far from it. My day job is as far away from the world of policy and government as it could be. But that is exactly the point. Those of you reading this are probably in a similar position - and yet want to understand what exactly is happening at a broad level in our polity. Is the government following through with its policies? What impact does something happening in far away Delhi have on your life? How can you become an informed citizen? I have a tenet: In a world with all the answers, the trick is to ask the right questions. That is the purpose of this column - take an issue, deconstruct it, and ask the right questions. I will try my best to point you in the general direction of the answer, but it is unlikely is that going to be the complete picture, largely because these are complex and temporal issues, changing day by day. However the hope is that the next time you come across someone talking about MSP and the government’s efforts for farmers, you will keep this background in mind, and ask the right questions. What is the Minimum Support Price? It is a price at which the government “guarantees” that it will purchase “certain crops” from the farmer. It is primarily to ensure that farmers are not pushed to do a distress sale of produce in years of excess production. The MSP is typically below the market price, so it essentially sets a floor price for crops. It also ensures food security, since a large percentage of the procurement is towards distribution via the PDS (Public Distribution System aka ration shops). Who Decides the MSP? The Committee for Agricultural Costs and Prices (CACP) in the Central Government’s Ministry of Agriculture recommends prices based on a set of factors. The final decision to set the MSPs is taken by the Cabinet Committee on Economic Affairs (CCEA) - one of the highest executive bodies in India, which includes the PM and the FM. The recommendations of the CACP to the CCEA are based on a number of factors, including input price, estimated demand and supply of the crop, international price movements, price levels of different crops, effect of the MSP on market conditions and so on. Details from the CACP website here. When is the MSP Announced? It is announced generally at the beginning of the crop sowing season, and gives farmers indications on the capacity of the government to buy what they produce. Is the MSP Valid For All Crops? No, it is not. There is a set of 23 crops for which MSP is recommended by the CACP. As of now, CACP recommends MSPs of 23 commodities, which comprise 7 cereals (paddy, wheat, maize, sorghum, pearl millet, barley and ragi), 5 pulses (gram, tur, moong, urad, lentil), 7 oilseeds (groundnut, rapeseed-mustard, soyabean, seasmum, sunflower, safflower, nigerseed), and 4 commercial crops (copra, sugarcane, cotton and raw jute). How is MSP Calculated? To answer this question we will have to dive into what the government considers as ‘cost of production’. There are three broad classifications of the cost given by the CACP - A2, A2 + FL, and C2. The difference between the 3 classifications is the variables that are considered to be inputs to each. A2 - All costs actually paid out by the farmer - including costs of seeds, fertilizers, hired labour, fuel, irrigation etc. A2 + FL - This includes everything in A2 and also includes the cost of family labour, considering that farming in India is largely a household activity where members of the family actually till the land and use their time. This measure adds a cost of this time to the cost of production as well. C2 - This is called the comprehensive cost. It includes everything in the above two measures and also adds assumed rents for owned land and machinery i.e. a cost for acquiring fixed assets required to complete the farming activity. In 2004, the Union government constituted the National Committee on farmers (headed by MS Swaminathan and hence also called the Swaminathan Commission). The MS Swaminathan Committee report had recommended a minimum support price of 50% profits above the cost of production classified as ‘C2’ by the CACP, among other long term policy changes. Details here. So What Does the 50% Above Cost of Production Actually Mean? First - the recent announcement for the government is based on taking cost of production as A2, not C2 as recommended by the Swaminathan Committee. So if you’re a farmer who has just bought a tractor to till land, the rent/interest on the tractor would not be taken into consideration while arriving at the MSP. This is the primary concern with the recently announced hike. Here is an Indian Express article with math, which shows that the recommendation of 50% return over costs is satisfied for all crops only if the cost of production is taken as A2, i.e. the lowest level possible. If C2, or comprehensive cost is taken into account, the 50% above cost is satisfied only for a single crop. So even at a very high level, a farmers or his family’s labour, interest costs etc are not included in the calculation of MSP. Essentially the farmer’s time and effort for actually working on the land are not considered in the cost of production. The 50% margin is not something that goes into his pocket - he has to pay out interests, satisfy the bare minimum food, livelihood etc requirements, and only then can he count what he has left for longer term expenses. Read it again & think about it for a second before you move on. Are Farmers Able To Sell Anything They Produce? This brings us to the second problem with MSPs. They are announced only for a few major crops (23) - and the list does not include any perishable items like fruits and vegetables or milk. (Hence the frequent images of farmers dumping tomatoes and milk on roads - these crops simply are not supported by the government MSP). Okay, so does this make life better for the farmers who do produce from among the 23 crops? Now we get into some implementation details. How does the government assure that MSP is guaranteed for these 23 crops? Government organizations like the Food Corporation of India buy from farmers at MSP. This has two objectives - price security for farmers as well as ensuring food security by building up buffer stocks needed in emergencies (eg: the recent floods in Kerala, Karnataka, now Nagaland). However, the capacity for procurement is not infinite i.e. there is no situation where ALL surplus crop which can’t be sold in the market can be bought at MSP. This is because the procurement operations on the ground are not good enough and also because state governments don’t have enough money for purchasing. For all intents and purposes, only rice and wheat (being staple crops) have a near guarantee of procurement at MSP. For the rest of the crops, it fluctuates year to year and state to state. So...What Does This Mean? Essentially, MSP is NOT a guarantee of procurement at that price for any crop. If that is the case, how can successive governments claim that this is big step to increasing farmers incomes? The answer is - it is not. MSP is a short term step, and it is extremely tactical, not strategic. Any increase in MSP is good optics for any government in power, since 50% of India’s labour force is engaged in agriculture, and the rest of us don’t really understand what happens on the ground, having given up using our ration cards a long time ago. Additionally, since procurement for rice and wheat is robust, this incentivizes farmers to produce these two crops, irrespective of the demand in the market, or the capacity of their land to have high productivity for these two crops (rice and wheat need a lot of irrigation and fertilization). This is just one of the ways the MSP mechanism distorts market demand supply. However, until such a time as infrastructure and supply chain linkages between demand and supply centers are fixed, MSP remains a necessity - even though it does not guarantee anything! Here’s an article detailing the issues with procurement at MSP. What’s Next? Considering the imperfections of the MSP mechanism in delivering actual prices to farmers, the government has also announced another set of schemes (it’s election year, so this is going to be the norm). One of them is called Price Deficiency Payments - where the farmer sells his produce in the market (not to the government) at the market price. If the market price is below the MSP, the government compensates the farmer with the difference in prices directly to the farmers bank account. On paper it seems solid, but again ask yourself - is it implementable? This means the government has to identify each farmer individually, figure out how much he has sold at what price and then transfer money to his account. It’s an ideal solution, and we can only hope the government machinery can implement it properly. The government is also considering using private players to add to the procurement infrastructure. I’d be wary, because this opens up avenues for corruption - the private sector is not known for its compassion towards consumers, and its not implausible to think of a scenario similar to the politician - contractor - bureaucrat nexus that exists in road construction today. Here’s a good article with the latest. Phew, so that was long. But important. Indian agriculture is in a mess. Don’t let anyone tell you otherwise. This article covers only a minuscule part of the problem, and again, the focus is on asking the right questions. Read, be informed, and make up your own mind. Until next week. References MSP basics - A summary of MSP Reports on Doubling Farmers Income - Ministry of Agriculture - This is a list of longer term measures Government Procurement operations - Food Corporation of India You can subscribe to my weekly letter series titled "Policy & Governance for Dummies" by clicking here. View the letter archive by clicking here. (We are now on your favourite messaging app – WhatsApp. We highly recommend you SUBSCRIBE to start receiving your Fresh, Homegrown and Handpicked News Feed.)
Theatrical Windows and its gradual shortening over the years has been a subject of extensive debate across the film industry. One wonders if studios and exhibitors will embrace this shifting dynamic or try and fight it. ‘Theatrical Windows’ – an integral component of the film value chain “Theatrical window’ represents the time between a movie’s theatrical release and its first availability on an alternate distribution channel such as DVD, Electronic Sell Through (EST) – one time transaction allowing a consumer to digitally rent or own a title, Subscriber Video-On-Demand platforms or a television network, whichever comes first. Said another way, it is the time period during which the only way to legally consume a movie is by going to a theatre - typically around 90 days but could vary significantly by title and geography. Within the entire film distribution value chain, the principle of ‘theatrical windows’ is a fundamental underlying pivot. It’s an age-old principle, but one that has been garnering an increasing level of scrutiny from wide-ranging industry participants. The existence of theatrical windows has far-reaching impact on not just film economics but also in swaying consumption behaviour. After the theatrical window collapses, the title cascades through various digital delivery platforms and television broadcast networks over a period of time, all depending on individual title-by-title agreements. The chart below depicts a typical flow-through of a film title across various windows beginning from theatres and ending at free television. Source: Lionsgate Company Reports Rattling Windows In Hollywood and across the world to a certain extent, theatrical windows have been a contentious subject of discussion for various industry participants (studios, distributors, exhibitors, artists, digital delivery networks, television networks etc). Discussions range from identifying the appropriate length of typical window to questioning their outright existence. On one hand, windows offer a protected ring-fenced revenue generating edge for exhibitors, on the other hand, studios increasingly perhaps feel shorter windows could potentially boost earnings from non-theatrical avenues. It is clearly a subject where motivations and incentives are not entirely aligned. However, which way the industry appears to be heading at least directionally is evidently seen in the chart below – a decline in the length of theatrical windows over the years, albeit modest. Source: National Association of Theatre Owners In my view, there are a few reasons for the downward sloping trend in the above chart. First, due to choppy attendance at theatres, studios perhaps increasingly see shorter window as a catalyst for increased revenue generation. This can be achieved by either renting out a digital copy of the title directly to consumers (via EST, TVOD) or selling a title’s first window rights to an SVOD platform such as Amazon Prime Video or Netflix. The potential downtick in theatrical revenues from such a strategy could perhaps be more than offset by higher revenues from these new outlets. In fact, the sooner it is sold on alternate channels, the higher price studios can possibly claim. For example, as per industry grapevine, North American film studios are making a case for a $50 digital rental for a movie for home-viewing for 48 hours merely 17 days after its theatrical release. It hasn’t really materialized, but it clearly endorses the potential economic benefit of such strategies and a 17 day theatrical-window is literally unheard of. Recall, a film typically makes close to 80-90% of its theatrical revenue in the first couple of weeks, before sharply falling off. In that context, it’s probably economically prudent for studios to switch over from theatres soon after the initial spike and explore other modes. Second, the massive marketing efforts undertaken by distributors and studios for a movie’s theatrical release can seamlessly spill over and be reused to market the title on the subsequent window as well if the window is fairly short. The longer is the window the more will there be a need to deploy another round of marketing spend as the initial marketing for theatrical window becomes somewhat stale. Third, quicker legitimate ways of viewing a movie in a non-theatrical set up allows some sort of defence to revenue leakage due to piracy. Exhibitors Will Bear the Ultimate Brunt from Shortening of Windows The ultimate losers from shortening theatrical windows are, in my view, the exhibitors. They have historically milked untouched exclusivity for the duration of the window and have leveraged it to monetize movies under a per patron pricing model. Per patron pricing is unique to exhibitors unlike a Netflix, Amazon Prime Video or Television wherein one subscription or even one rental can serve many eyeballs. Exhibitors typically collect around 50% of box office receipts (passing on the remaining to distributors) and the fact that the movie is available exclusively only at theatres is a nice source of competitive advantage. So a collapsing theatrical window certainly does not bode well for them. Furthermore, the big question for exhibitors is - does early availability of a title on alternate platform cannibalize theatrical revenues for the first couple of weeks or will the core enthusiast movie watcher still end up going to the theatre in those weeks. It is a question that can only be answered in hindsight in my view – but is it worth experimenting? I suspect, exhibitors find it a risk worth not taking and something that could set a dangerous precedent. And exhibitors have not left their feelings unheard. A great example from Hollywood is Crouching Tiger, Hidden Dragon: Sword of Destiny which released on Netflix day-and-date in North America. Day and date refers to a movie title being released on alternate forms the same day as its theatrical release and in this case the alternate form was Netflix. It was in effect a zero day theatrical window. This prompted North America exhibitors to collectively boycott the movie entirely on theatres. While an isolated example, it clearly underlines the intent from exhibitors. Declining Windows Even in India, Netflix and Amazon Prime Video are Key Drivers Even in the Indian context, theatrical windows are clearly seeing some sort of a downward trend. Amazon Prime Video’s deal with Salman Khan last year allowing exclusive rights for a title after the theatrical release but two months before any television premier is clear undercut to the traditional window by at least two months. Even on an ad-hoc basis, there are several other individual titles ranging from indie titles to tent-poles which have found their way on SVOD platforms fairly early on. Films such as Newton, Toilet: Ek Prem Katha, Raazi etc were available on SVOD platforms in around a month or so. There are many such examples which clearly underline the trend of declining theatrical windows in India as well. However, I suspect, the role played by SVOD platforms is heightened in the Indian film eco-system. Furthermore, I believe, a ubiquitous piracy market in India makes shortening of the window a much easier business decision for the industry. While we are still in early days and I suspect a zero theatrical window is not the future, I believe we will see a heightened degree of variability from title-to-title in the actual theatrical window length. That being said, exhibitors should brace for change and continue to evolve their business diversifying away from just core box office. An excellent example from the Canadian circuit is Cineplex, an exhibitor with near 80% market-share but has gradually built out robust alternate revenue lines ranging from e-sports, digital signage, location based entertainment solutions among others. This has seen their box office revenue share decrease gradually over the years to under 50% now. I suspect, over time we will see domestic exhibitors also increasingly embrace alternate revenue lines to hedge their box office exposure. Its an industry at the periphery of tech but has seen a somewhat low level of innovation and evolution compared to other players in the larger tech ecosystem. This will be a recurring column published every Saturday, under the title: “Rise of Video”. (We are now on your favourite messaging app – WhatsApp. We highly recommend you SUBSCRIBE to start receiving your Fresh, Homegrown and Handpicked News Feed.)
By Andrea Canidio, Stone Fellow of the INSEAD Stone Centre for the Study of Wealth Inequality A new mechanism for financing innovation: seigniorage. Most blockchain projects are open source and therefore free to use. Despite this, developers of open-source blockchain projects can reap large financial rewards thanks to a novel class of assets, called cryptotokens (or cryptocurrencies). In a recent working paper “Financial incentives for open source development: the case of Blockchain”, I propose calling this novel finance mechanism seigniorage. Historically, seigniorage is profit earned by a government when issuing currency. For blockchain, it is profit earned by a software developer when issuing a cryptotoken that is required to use software. In my paper, I build a game-theoretic model and show that, despite its effectiveness at channelling funds from investors to developers and entrepreneurs, seigniorage can give rise to serious incentive problems. Existing data show that seigniorage is becoming extremely relevant. In 2017, blockchain start-ups raised an estimated US$7 billion via initial coin offerings, or ICOs. (ICOs occur when tokens are first sold to investors; subsequent sales are typically held on the open market.) This figure is much larger than the funding by traditional VCs (estimated at US$1 billion in 2017) and by other non-traditional sources, such as crowdfunding. Blockchain Blockchain is better understood in relation to the internet. The internet protocol suite (commonly known as TCP/IP) was developed to allow decentralised data transmission, i.e. the transmission of data via a network of computers in which no individual node is essential to the functioning of the network. It is the technological foundation of a second set of protocols (also called application-layer protocols) handling specific types of data: HTTP for accessing web pages, SMTP, POP and IMAP for sending and receiving emails, etc. The development of the internet protocol suite was financed by the Defense Advanced Research Projects Agency (DARPA). The goal was to increase military communication resilience by moving from a hub-and-spoke model of communication to a complete network model of communication. In the hub-and-spoke model, a central node delivers all messages and is therefore essential: If eliminated, no communication can occur. In the complete network model, communication among any two nodes can occur even if any other node is eliminated. These two network structures are also very different with respect to the economic environment they create. In the hub-and-spoke model, the central node acquires market power: It can filter information and charge fees. In the complete network model, no node has market power. Before the internet, intermediaries like media companies exploited their market power by making both accessing and transmitting information costly. For example, finding out the latest sport results or stock prices required the purchase of a newspaper. In the internet age, information can be sent, received, published and accessed for free, for the most part. This has brought about a historical transformation: The limiting factor in information consumption is no longer the availability of information itself, but rather the availability of attention and time. Blockchain further expands the possible operations that a computer network can perform. Like TCP/IP, it allows for the decentralised transmission of data, but also permits the decentralised storage, verification and manipulation of data. Blockchain is also similar to TCP/IP in that both provide the foundation for a number of application-layer protocols. The most well-known is the bitcoin protocol, which allows a network of computers to store data (how many bitcoin each address owns) and enforce specific rules regarding how these data can be manipulated (no double spending). Importantly, without blockchain technology, maintaining the same type of data would require a traditional organisation (typically a bank). Numerous other blockchain-based protocols currently exist or are being actively developed. For example: Protocols for building applications that can run on a decentralised network rather than on a specific computer (Ethereum, Tezos) Protocols for decentralised real-time gross settlement (Ripple, Stellar) Protocols enabling the creation of a decentralised marketplace for storage and hosting of files (Sia, Filecoin) and for renting in/out CPU cycles (Golem) Protocols creating fully decentralised prediction markets (Augur), financial exchanges (0x) and financial derivatives (MakerDAO) Protocols allowing for the existence of fully decentralised organisations (Aragon); and many more. Profits from Tokens An important difference between the protocols built on TCP/IP and those built on blockchain is how their developers are rewarded. Most TCP/IP protocols are open source, free to adopt and use. Project contributors are not organised in a single, traditional company, but rather form a loosely defined group around one (or more) project leader, based on open collaboration. Developers do not receive direct financial compensation for their contributions and are motivated by career concerns (i.e. boosting their reputation to reap a future financial benefit) or by non-monetary considerations (i.e. contributing to public good). The development of blockchain-based protocols, on the other hand, can leverage financial incentives. Seigniorage allows developers of open-source blockchain-based projects to benefit financially from their work. As an illustration, consider a population of agents who wish to transact but lack the required infrastructure. These agents may want to exchange a physical good, but there may be no legal system or agreed-upon unit of measurement. Alternatively, the exchange may be between computers, in which case the technical specifications governing communication between machines may be missing. An entrepreneur may decide to invest resources and create this missing infrastructure, and, with it, a market. One way to profit from this investment is to create a token and force all exchanges on this market to use it. All prices within the market can be expressed in fiat currency (i.e. a legal tender such as euros or dollars), but must be paid using the token. The entrepreneur owns the initial stock of tokens and can credibly commit to limit their supply. If the market is successful, there will be a demand for these tokens, a positive price for tokens and thus profits for the entrepreneur. The way blockchain enables seigniorage is threefold. First, blockchain can be used to create the infrastructure and therefore a marketplace. Second, the rules determining whether (and how) the supply of tokens increases over time can be set initially and cannot be manipulated afterwards. That is, using blockchain, the entrepreneurs can commit to a specific supply of tokens. Finally, the protocol also prescribes the use of a certain token; it is not possible to transact using a different token. The Perils of Seigniorage But how effective is seigniorage as a mechanism to finance innovation? To answer this question, I built a game-theoretic model of blockchain financing. In the model, a developer (or a team of developers) exerts effort and invests resources in the development of a blockchain-based protocol. However, the developer may not have enough resources to invest efficiently in the protocol development. A solution becomes to hold an ICO and sell some tokens to investors to raise funds. The key observation is that, post-ICO, investors and users of the protocol will start trading tokens on financial exchanges. The developer will also be able to sell additional tokens on those exchanges. This situation creates, in game-theoretic jargon, an anti-coordination problem. If investors, who are by definition forward-looking, expect the developer to diligently create a successful protocol, this expectation should be priced in. But in such case, the developer would be better off selling all his tokens, cashing in on the future work without completing the project. If investors instead believe that a developer is not likely to complete the project, then the token price should be zero. However, this does not mean the tokens are worthless: The developer could keep them all, improve the protocol and then sell them once the project is successful. The analysis of the model reveals that, in equilibrium, the game always carries a positive probability that the developer will sell all tokens and stop development. Even though the environment considered here has no informational asymmetries (i.e. investors are perfectly able to evaluate the project quality and the developer’s ability), a positive probability remains that the developer will simply walk away. Implications ICOs (and seigniorage) are effective in providing the developer with funds to invest in the protocol development. At the same time, holding an ICO also generates an incentive problem: There is some probability the developer will sell all tokens and walk away. The existence of this trade-off has several implications. To start, developers should hold ICOs as late as possible in the development cycle. Ideally, they should wait until the protocol is ready for use. Second, some form of vesting – a post-ICO period during which developers cannot sell their tokens – should be required. Third, post-ICO, developers should keep a sufficiently high share of tokens, to maintain “skin in the game” and continue the development of the protocol. Blockchain has the potential to be a transformative technology. The realisation of this potential will depend on the incentives generated by seigniorage. My paper shows that seigniorage generates some incentives, but their strength is limited by the fact that, in equilibrium, there is some probability that developers will sell all their tokens and walk away. In the absence of better rules or regulation, the existence of projects that fail to deliver following an ICO should not be considered exclusively the outcome of a few scams, but rather an unfortunate consequence of the financing scheme adopted by these projects. Andrea Canidio is the Stone Fellow of the INSEAD James M. and Cathleen D. Stone Centre for the Study of Wealth Inequality and an Assistant Professor of Economics at the IMT School for Advanced Studies, Lucca, Italy. Follow INSEAD Knowledge on Twitter and Facebook. This article is republished courtesy of INSEAD Knowledge. Copyright INSEAD 2018. (We are now on your favourite messaging app – WhatsApp. We highly recommend you SUBSCRIBE to start receiving your Fresh, Homegrown and Handpicked News Feed.)
As a wide-range of video platforms continue to proliferate the domestic market, the consumer appears to be fatigued and overwhelmed by the myriad of choices at disposal. Time and Money are both finite resources and consequently building a bespoke content package appears to be the order of the day. Over the last four weeks, as part of a series we called - Rise of Video, I touched on the Indian Video-On-Demand (VOD) landscape. Subsequently, I did a deep-dive into Netflix, Amazon Prime Video and Hotstar, albeit through an India-tinted lens. In that backdrop, I am now concluding this series by an attempt to tie these content platforms with the consumer’s wallet. It’s an exercise which is somewhat challenging driven largely by diverse range of individual content preferences but also a noisy pricing environment impacted by dynamic discounting, one-time offers and other ad-hoc factors. As VOD platforms including but not limited to the aforementioned platforms, continue to proliferate the domestic marketplace, we find ourselves amidst a rapidly evolving environment. All VOD platforms appear to be competing for eyeballs with a common underlying objective – net subscriber progression (gross subscriber progression, less churn). In that context, we are already seeing a fairly crowded marketplace with multifarious content offerings (exclusives and non-exclusives) distributed across a range of platforms. Each platform presenting a compelling case of its own. Consequently, the consumer appears to be fatigued and overwhelmed by the myriad of choices at disposal. While it is difficult to break down on what services and platforms appeal to who at an individual level of granularity, one thing is certain – services cannot be infinitely additive. Said another way, time and money are both finite resources and there is a theoretical upper-limit on both those variables from the perspective of deployment towards video content consumption. In that context, one has to be selective and strategic on what services to choose to serve ones respective content needs. This presents the classic challenge of decision-making. Building the A-la-carte Content Package Let’s take a back of the envelope crack at estimating one’s annual expense on video content. Admittedly, by no means is this an exhaustive exercise as it is an insurmountable endeavor to factor in every permutation and combination. Direct-To-Home (DTH) Operators (such as Tata Sky , Airtel TV etc) appear to be a nice starting point – still the backbone of content viewing in many urban households and largely resistant to choppy internet connections. DTH operators typically deploy bundled pricing strategy. Consequently, depending on the choice of programming yearly bill can range from ~INR 2,000 for a basic package to ~INR 8,500 for the complete all HD offering (excluding one-time set top box costs) per screen. With meaningful regional channels and several channel packages with confusing nomenclatures (by design I would argue) in the offering, choices can vary substantially from subscriber to subscriber. In contrast, Over-the-top (OTT) VOD platforms offer relatively fewer pricing tiers. Netflix prices range from INR 500 per month (for one screen in Standard definition) to INR 800 per month (for four screens and High Definition/Ultra High Definition) implying INR 6,000 – INR 9,600 on an annualized basis. Note that the actual content is same across those tiers. Hotstar, on the other hand, operating under a freemium model ranges from free (limited content) to annual prices of INR 299 (sports content) and INR 999 (all content included). Meanwhile, Amazon Prime Video with a single price tier of INR 999 per year offers all content available on the library and is bundled with benefits associated with their core e-commerce business. Throw in Colors-owned Voot (free), Balaji Telefilms-owned Alt Balaji. Google owned and ad-supported giant YouTube into the mix, among others, and the choices for content consumption ramp up fairly quickly. In the table below, I have presented a laundry-list of selected video platforms with a corresponding expense estimate. In this exercise, I have included spends on wireline broadband and mobile data despite not really being pure content spends but somewhat prerequisites for OTT viewing. One might dedicate only a percentage of their mobile and broadband spend towards video content consumption, however for the sake of simplicity we have taken a binary approach of included it all or exclude it all. In that context, subscriptions to all the services (in addition to internet) can range from ~ INR 19,000 to INR 50,000 on a full year basis. However, subscription to all aforementioned OTT platforms, might make the subscription to a DTH service somewhat redundant which should drop the spend by INR 2,400 to INR 8,500 on average. As alluded to earlier, there is an additionally layer of complexity with one-time promos and other B2B deals, wherein some premium internet packages include free subscription to a VOD platform for the first year. This aspect is ignored largely due to its non-recurring characteristic over the longer-term. For example, Airtel broadband subscription includes first year of Amazon Prime membership free, which is not adjusted for in the above chart. It is clearly evident that the range in DTH pricing is significantly wider than OTT VOD services. This is fairly intuitive - for example Netflix has the same content across its pricing tiers - it’s the quality that varies from SD to HD (and also no of screens which is yet another unadjusted factor). Amazon has only one tier. This compares to DTH’s long list of packages at wide ranging price points. Needless to say, this is just a back of the envelope exercise and one can see meaningful shifts depending on the exact combination of products/services especially on the Television side. YouTube is a free ad-supported platform, however we have included it since the role of YouTube content in eating up your overall content consumption time can be meaningful for some and also its increasingly ubiquitous nature. Money is a finite resource which almost certainly will have an upper-limit. Similarly, time is a limited inventory and 24 hrs a day or 8,760 hours a year are hard ceilings, although actual content consumption time will probably be fraction of that anyway. Happy viewing! 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By Claudia Zeisberger, INSEAD Senior Affiliate Professor of Decision Sciences and Entrepreneurship and Family Private equity has evolved and is attracting increasing interest. Some 41 years ago, George Roberts, Jerry Kohlberg and Henry Kravis pulled together $120,000 to form their first private equity (PE) fund. There were no such funds in those days and nobody else appeared to be doing what was then called leveraged buyouts. Little did they know that they were starting an industry. At the time, transactions were less sophisticated and many players saw their job as stripping down assets and flipping them for a profit. Investments are very different today. Rebranding into private equity, investment firms have become “active owners” that bring skills and expertise along with capital to add long-term value to their portfolio companies. “We’ve learned to think of ourselves as industrialists,” writes Henry Kravis in the foreword to my book, Mastering Private Equity: Transformation via Venture Capital, Minority Investments & Buyouts. To be successful today, PE firms have to think like transformation agents with an impact on the economy at large. PE firms are, indirectly, amongst the top 10 employers in the world. PE firms’ responsibilities and skills, as documented in the book, extend not only to the board room but to the shop floor and beyond. From governance to operations, PE funds are no longer just hands-off investors seeking to profit through financial engineering. The PE Firm of Today My book, co-authored with Bowen White and Michael Prahl, both INSEAD alumni, takes an in-depth look at how today’s PE investors transform businesses and provides the following insights. Find Your Partner Both boards of investee companies and PE firms must first do their own due diligence and find the partner that is best aligned with the management team’s skillsets, the company’s current development and its future plans. There are many options available for companies looking for a PE partner, ranging from venture capitalists to buyout specialists. Venture capitalists, for example, are minority investors betting on the future growth of early-stage companies that may not yet have profit, revenue or even a product in play. Occupying the space between venture and buyout investing, growth equity funds invest in fast-growing businesses, which have moved beyond the start-up stage, in exchange for minority equity stakes. Buyout funds represent by far the majority of global capital invested by PE funds, both today and historically. By acquiring controlling equity stakes, buyout investors are able to restructure the financial, governance and operational characteristics of their investee companies, as needed to drive value creation. Even for companies in distress, burdened by debt or struggling to make an operating model work, there exist alternative PE funds that specialise in turnarounds. Alignment of Visions PE funds perform well when they source deals in line with their area of expertise – giving them a better base from which to assess risks, opportunities and portfolio fit from the start – in addition to their industry know-how and value-add through networks and insights. Partnering with entrepreneurs and owners who have a common vision for the business and having the right management team in place is as important as rigorous financial due diligence. Active Ownership Clear plans and decisive management throughout the lifecycle of the investment are also crucial to ensure successful exits; these priorities are supported via PE’s "active ownership" model, which works particularly well in a controlled buyout setting. Active owners engage closely with their investee companies to shape strategy and management, monitor performance and provide feedback and coaching when appropriate. While the board of directors is the main channel through which PE investors influence the performance of portfolio companies, PE firms typically engage beyond the board to address specific priorities within company operations. They can deploy their expertise to add value, such as during mergers and acquisitions and refinancing situations. As a “repeat” player in these areas, PE firms bring domain expertise to their investee companies. Understanding the entire PE ecosystem is increasingly important for PE investors, board members and senior management teams alike. The historically low interest rate environment continues to put pressure on portfolio managers in their search for excess returns. Ignoring the investible universe of non-listed companies and focusing on public equities only is a luxury few can afford. Our research and data have shown that all limited partners (LPs) – but in particular large pension plans in the U.S. and Europe – will continue to be enthusiastic allocators to PE. Some are even finding ways to go direct, such as the Ontario Teachers’ Pension Plan in Canada, which has built its own internal expertise and capabilities to conduct PE deals. The increased interest in private equity as an asset class and the impressive returns shown in the last decade have led to the formation of an industry in its own right. PE assets under management (AUM) have more than doubled in the last five years, while venture capital AUM has more than tripled. When compared to the public markets, PE AUM has grown three times faster and regularly outperforms its public market competitors. This has even prompted Norway’s pension plan and Japan’s Government Pension Investment Fund, long holdouts, to finally add PE to their investible universe, and most LPs to increase their allocations to the asset class. The institutionalisation, maturation and success of PE has spurred offshoots, as LPs and general partners (GPs) seek to apply the PE investment model to different asset classes. Indeed, when combined with investments in infrastructure, natural resources, real estate, distressed PE, secondaries, co-investment and mezzanine funds, AUM has grown to $4.5 trillion as of year-end 2016. Based on the current growth trajectory, the share of private capital in alternative strategies is likely to continue to expand. Source: Preqin Coupled with overall demand for private market opportunities amid lackluster public market returns, PE funds are likely to continue to play an important role in getting capital and expertise to deserving companies. Claudia Zeisberger is a Senior Affiliate Professor of Decision Sciences and Entrepreneurship and Family Enterprise at INSEAD and the Academic Director of the school’s Global Private Equity Initiative. She is the co-author of the recently launched book, Mastering Private Equity: Transformation via Venture Capital, Minority Investments & Buyouts. A companion book, Private Equity in Action, takes the reader on a tour of the private equity investment world through a series of case studies written by INSEAD faculty and taught at the world's leading business schools. Follow INSEAD Knowledge on Twitter and Facebook. This article is republished courtesy of INSEAD Knowledge. Copyright INSEAD 2018. 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From an Indian perspective, the year thus far has been jolted by several macro themes which I believe are notable headwinds for the economy. First, a hawkish environment in the western world characterised by monetary tightening is a marked reversal to an elongated period of quantitative easing and declining interest rates. Consequently, a textbook “flight to quality” thesis is at play, in effect driving capital outflow from India and other emerging markets inducing a real contagion risk. Second, an uptick in crude oil prices through the year (crude oil is up 7%+ year-to-date) has pressured fiscal deficits and could pull the handbrakes on the growth profile of an economy that relies on overseas supply of crude oil for nearly 80% of its demand. The combined effect of the aforementioned two factors have induced the Third - a swift depreciation in the INR which is down nearly 14%+ year-to-date against the USD. Fourth, escalating US-Sino trade tensions have certainly taken some shine off the global growth outlook. A deep-dive on these macro themes and others can be found in this excellent opinion piece by Nikhil Arora: Current State of the Indian Economy: Is it Time to Go Bearish? However, the domestic stock market headlines numbers illustrate a somewhat different narrative. Nifty 50 and BSE Sensex have seen fairly robust growth year-to-date. Nifty 50 is up around 9% and the BSE Sensex is up around 12%. If one were to look at Nifty 50 through just the macro-lens, one could just as easily have expected the opposite movements in the markets. An equally palatable outcome one might argue. In that context, one wonders if the strength in domestic headline numbers is indeed a proxy for underlying economic health? A Look Into The Nifty 50 – “Weights” Matter Nifty 50 is considered the flagship index on the National Stock Exchange, tracking the behaviour of the largest and most liquid blue chip stocks. Given its diverse constituents, healthy liquidity and general clout, it is often treated as a proxy for overall economic health. However, due to its float-adjusted market capitalization based indexing method, the bigger and larger constituents can meaningfully sway the entire market. While, this is true for all market capitalization based indexing methods, a detailed look at the index constituents makes for an interesting read through. This is all the more interesting given that there are a plethora of macro catalysts simultaneously at play in the current environment. From a simplistic perspective, higher the weight of the stock in the Nifty 50 index, more is its directional pull on the index. An example that demonstrates this fairly well is Reliance Industries Limited (RIL). RIL has close to 10% weight on the Nifty 50 due to its lofty market capitalization. RIL stock is up around 35% year-to-date, a remarkable surge which would make even a high risk-high return type growth investor fairly content with the year-to-date return. However, what one might miss easily is the massive say that RIL and its 35% surge has had in moving the Nifty 50 headline numbers, which are the ones that are usually reported by the mainstream press anyway. Another example is a yet another heavy ’weight’ - HDFC Bank, also constituting nearly 10% to the Nifty 50 weight and somewhat similar to RIL has also seen its stock climb year-to-date. HDFC is up a robust 10% year-to-date and consequently has significantly contributed to Nifty 50’s upward movement. Source: nseindia.com Weights are as of Aug 31st market close Reliance Industries Ltd, HDFC Bank, Housing Development Finance Corporation, Infosys Ltd and ITC Ltd together accounting for nearly 40% of overall weight of the Nifty 50 and are all up meaningfully. In fact, all top ten stocks by weight on Nifty 50 are all up year-to-date. On traversing down the Nifty 50 constituents, one can quickly decipher that bigger weight stocks have generally seen upward movements year-to-date and in turn helped galvanize the broader Nifty 50. An example from closer to the other end of the spectrum is Hindustan Petroleum Corporation Ltd which is down 40% year-to-date making it the worst performer in the Nifty 50 but has less than 1% weight on the Nifty 50 index. In fact, the top 10 constituents by weight on the Nifty 50 are all in the green year-to-date and collectively have enough pull to dictate Nifty headline numbers. However, drilling down into the Nifty 50, one can see less than half i.e. 24 (at the time of writing) are in the green while the other 26 are in the red. But the 24 stocks in the red i.e. trending down year-to-date, on account of weight asymmetries have significantly lower impact on the broader index. In that context, while the headline numbers intuitively paints an optically pleasing picture, a deeper-dive into the index portrays a less optimistic picture. One wonders if Nifty 50 with just 50 stocks and such diverse market capitalization ranges is even a fair representation of the overall market. (We are now on your favourite messaging app – WhatsApp. We highly recommend you SUBSCRIBE to start receiving your Fresh, Homegrown and Handpicked News Feed.)
It was a fine evening in November 2016 and I was walking back home from work. I received an SMS cryptically asking me to tune into the PM’s broadcast that night. I plugged in my earphones and heard what everyone in India would find out in the next 30 mins - Rs 500 and Rs 1000 notes were now worthless. Thus began a saga that lasted a few months - old notes were to be deposited, new notes printed and distributed, and the economy was to get a reboot. While people shout at each other on the 9 pm news about alleged Urban Naxals and pass judgments while the Courts are yet to pronounce theirs, objective discussions on costs and benefits of demonetisation have stayed off the airwaves. RBI's Annual Report has finally given us some numbers to look at and analyze how the costs and benefits of demonetisation compare. Why Demonetisation? A few reasons were (in the order they were shared with the public) Black Money: The idea being that money hoarded illegally would be flushed out of the system - since the government was going to keep a track on deposits into the banking system and use that information to find people who now had money in the banking system disproportionate to their known sources of income. Counterfeit Currency: A) Old notes were worthless, so any cash hoarded by terrorists/criminals would now be worthless B) Counterfeiters would also now have to rework their infrastructure to copy the new notes, and in a best case scenario, not be able to counterfeit at all. Digital Payments: The retrospective notion that forcing people to adopt digital methods of payments would reduce the amount of cash in the economy, increase the traceability, and improve financial inclusion. All in all, It was supposed to be a short-term shock to the economy which would provide long-term benefits. Demonetisation is so 2016. Why Are We Talking About It Again? Because the Reserve Bank of India finally released its Annual Report last week detailing how much of the cash in the system actually came back. So finally, we have some objective numbers with which to evaluate the impact of demonetisation. What Does the RBI Report Say? 1. Did the amount of black money in the system reduce? 99.3% of the 15 lakh crore which was in circulation in November 2016 is now in the RBIs vaults. So two things could have happened. There wasn’t a lot of black money as cash in the economy to begin with. Initial estimates ranged from 5%-10% of currency in circulation being black, much higher than the 0.7% which was not returned to the RBI. This could make sense - there aren’t a lot of people who would be holding illegal money in cash, it would more likely be in real estate and gold. The other option is that the black money is now white in some form - some of it is deposited in the RBI, some in the form of assets, some still in cash, and is now for all practical purposes, legit. How did this happen? I mean we’ve all heard stories about a neighbourhood uncle with political connections who converted all his old notes into new via a ‘connection’. How much of this is true is still anybody’s guess. (unless the government starts prosecuting people who have too much cash in their accounts and can’t explain how - we are yet to hear about this happening. In fact FM Arun Jaitley has made this point in a Facebook post, saying 1.8m depositors have been identified for this enquiry - as seen below.). 2. Counterfeit currency: Overall detection of fake notes in 2017-18 was 31% lower than the previous year. Detection of Rs 500 and Rs 1000 notes has decreased by around 50%. But the new Rs 500 notes are still being counterfeited. Also, the Rs 2000 note is now the pick for counterfeiters. The RBI report says that only 638 pieces of fake Rs 2,000 notes were detected in 2016-17, but in 2017-18, 17,929 pieces (worth Rs 360 million) were detected. 3. Digital payments: Overall digital payments have increased massively since November 2016. In 2017-18, digital payment volume rose by 29%. But does this also mean households now prefer digital over cash? Not really. Household preference for cash: In November 2016, around Rs 18 lakh crore was the amount of currency in circulation, out of which around 86% was demonetised. Today, around Rs 18 lakh crore of currency is still in circulation! So even though digital payment volume has increased, people still have a preference for cash. What Was the Impact? We all faced the micro impact, but a sharp drop in GDP (~1%) was a predominant economic impact - much of India’s industrial sector runs in the unorganized sector where lack of cash constrained production and productivity. In addition, the RBI spent around Rs 13,000 crore to print the new notes and transport it across the country (whereas only around Rs 10,000 crore of the banned currency did not return into the system). So based on these costs, it does seem that demonetisation did not achieve its objectives. However, there are some long term impacts which are yet to be quantified - notably the effect of demonetisation on formalization of the economy i.e. more traceability of cash. better accounting, and higher tax collections. We have yet to see how that pans out. You can subscribe to my weekly letter series titled "Policy & Governance for Dummies" by clicking here. View the letter archive by clicking here. (We are now on your favourite messaging app – WhatsApp. We highly recommend you SUBSCRIBE to start receiving your Fresh, Homegrown and Handpicked News Feed.)
Emerging market stocks have stabilised, helped by the strength of US equities; Rising emerging market bond yields are beginning to attract investor attention; US tariffs and domestic tax cuts support US economic growth; US Dollar strength is dampening US inflation, doing the work of the Federal Reserve. To begin delving into the recent out-performance of the US stock market relative to its international peers, we need to reflect on the global fiscal and monetary response to the last crisis. After the great financial recession of 2008/2009, the main driver of stock market performance was the combined reduction of interest rates by the world’s largest central banks. When rate cuts failed to stimulate sufficient economic growth – and conscious of the failure of monetary largesse to stimulate the Japanese economy – the Federal Reserve embarked on successive rounds of ‘experimental’ quantitative easing. The US government also played its part, introducing the Troubled Asset Relief Program – TARP. Despite these substantial interventions, the velocity of circulation of money supply plummeted: and, although it had met elements of its dual-mandate (stable prices and full employment), the Fed remained concerned that whilst unemployment declined, average earnings stubbornly refused to rise. Eventually the US economy began to grow and, after almost a decade, the Federal Reserve, cautiously attempted to reverse the temporary, emergency measures it had been forced to adopt. It was helped by the election of a new president who, during his election campaign, had pledged to cut taxes and impose tariffs on imported goods which he believed were being dumped on the US market. Europe and Japan, meanwhile, struggled to gain economic traction, the overhang of debt more than offsetting the even lower level of interest rates in these markets. Emerging markets, which had recovered from the crisis of 1998 but adopted fiscal rectitude in the process, now resorted to debt in order to maintain growth. They had room to manoeuvre, having deleveraged for more than a decade, but the spectre of a trade war with the US has made them vulnerable to any strengthening of the reserve currency. They need to raise interest rates, by more than is required to control domestic inflation, in order to defend against capital flight. In light of these developments, the recent divergence between developed and emerging markets – and especially the outperformance of US stocks – is understandable. US rates are rising, elsewhere in developed markets they are generally not; added to which, US tariffs are biting, especially in mercantilist economies which have relied, for so many years, on exporting to the ‘buyer of last resort’ – namely the US. Nonetheless, the chart below shows that divergence has occurred quite frequently over the past 15 years, this phenomenon is likely to be temporary: Source: MSCI, Yardeni Research Another factor is at work, which benefits US stocks, the outperformance of the technology sector. As finance costs have fallen, to levels never witnessed in recorded history, it has become easier for zombie companies to survive, crowding out more favourable investment opportunities, but it has also allowed, technology companies, with no expectation of near-term positive earnings, to continue raising capital and servicing their debts for far longer than during the tech-bubble of the 1990’s; added to which, the most successful technology companies, which evolved in the aftermath of the bursting of the tech bubble, have come to dominate their niches, often, globally. Cheap capital has helped prolong their market dominance. Finally, capital flows have played a significant part. As emerging market stocks came under pressure, international asset managers were quick to redeem. These assets, repatriated most often to the US, need to be reallocated: US stocks have been an obvious destination, supported by a business-friendly administration, tax cuts and tariff barriers to international competition. These factors may be short-term but so is the stock holding period of the average investment manager. Among the most important questions to consider looking ahead over the next five years are these: Will US tariffs start to have a negative impact on US inflation, economic growth and employment? Will the US Dollar continue to rise? And, if so, will commodity prices suffer, forcing the Federal Reserve to reverse its tightening as import price inflation collapses? Will the collapse in the value of the Turkish Lira and the Argentine Peso prompt further competitive devaluation of other emerging market currencies? In answer to the first question, I believe it will take a considerable amount of time for employment and economic growth to be affected, provided that consumer and business confidence remains strong. Inflation will rise unless the US Dollar rises faster. Which brings us to the second question. With higher interest rates and broad-based economic growth, primed by a tax cut and tariffs barriers, I expect the US Dollar to be well supported. Unemployment maybe at a record low, but the quality of employment remains poor. The Gig economy offers workers flexibility, but at the cost of earning potential. Inflation in raw materials will continued to be tempered by a lack of purchasing power among the vastly expanded ranks of the temporarily and cheaply employed. Switching to the question of contagion. I believe the ramifications of the recent collapse in the value of the Turkish Lira will spread, but only to vulnerable countries; trade deficit countries will be the beneficiaries as import prices fall (see the table at the end of this article for a recent snapshot of the impact since mid-July). At a recent symposium hosted by Aberdeen Standard Asset Management – Emerging Markets: increasing or decreasing risks? they polled delegates about the prospects for emerging markets, these were their findings: 83% believe risks in EMs are increasing; 17% believe they are decreasing 46% consider rising U.S. interest rates/rising US dollar to be the greatest risk for EMs over the next 12 months; 25% say a slowdown in China is the biggest threat 50% believe Asia offers the best EM opportunities over the next 12 months; 20% consider Latin America to have the greatest potential 64% believe EM bonds offer the best risk-adjusted returns over the next three years; 36% voted for EM equities. The increase in EM bond yields may be encouraging investors back into fixed income, but as I wrote recently in How To Identify Valuable Bond Markets With High Yields there are a limited number of markets where the 10yr yield offers more than 2% above the base rate and the real-yield is greater than 1.5%. That Turkey has now joined there ranks, with a base rate of 17.75%, inflation at 15.85% and a 10yr government bond yield of 21.03%, should not be regarded as a recommendation to invest. Here is a table looking at the way yields have evolved over the past two months, for a selection of emerging markets, sorted by largest increase in real-yield (for the purposes of this table I’ve ignored the shape of the yield curve): Source: Investing.com Turkish bonds may begin to look good value from a real-yield perspective, but their new government’s approach to the imposition of US tariffs has not been constructive for financial markets: now, sanctions have ensued. With more than half of all Turkish borrowing denominated in foreign currencies, the fortunes of the Lira are unlikely to rebound, bond yields may well rise further too, but Argentina, with inflation at 31% and 10yr (actually it’s a 9yr benchmark bond) yielding 18% there may be cause for hope. Emerging market currencies have been mixed since July. The Turkish Lira is down another 28%, the Argentinian Peso by 12%, Brazilian Real shed 6.3% and the South African Rand is 5.7% weaker, however the Indonesian Rupiah has declined by just 1.6%. The table below is updated from How Trade Wars May Impact The Emerging Markets: Is Turkey the Canary in The Coal-Mine. It shows the performance of currencies and stocks in the period January to mid-July and from mid-July to the 28th August, the countries are arranged by size of economy, largest to smallest: Source: Investing.com It is not unusual to see an emerging stock market rise in response to a collapse in its domestic currency, especially where the country runs a trade surplus with developed countries, but, as the US closes its doors to imports and growth in Europe and Japan stalls, fear could spread. Capital flight may hasten a ‘sudden stop’ sending some of the most vulnerable emerging markets into a sharp and painful recession. Conclusions and Investment Opportunities My prediction of six weeks ago was that Turkey would be the market to watch. Contagion has been evident in the wake of the decline of the Lira and the rise in bond yields, but it has not been widespread. Those countries with twin deficits remain vulnerable. In terms of stock markets Indonesia looks remarkably expensive by many measures, India is not far behind. Russia – and to a lesser extent Turkey – continues to appear cheap. ‘The markets can remain irrational longer than I can remain solvent,’ as Keynes once said. Emerging market bonds may recover if the Federal Reserve tightening cycle is truncated. This will only occur if the pace of US economic growth slows in 2019 and 2020. Another possibility is that the Trump administration manage to achieve their goal, of fairer trading arrangements with China, Europe and beyond, then the impact of tariffs on emerging market economies may be relatively short-lived. The price action in global stock markets have been divergent recently, but the worst of the contagion may be past. Mexico and the US have made progress on replacing NAFTA. Other countries may acquiesce to the new Trumpian compact. The bull market in US stocks is now the longest ever recorded, it would be incautious to recommend stocks except for the very long-run at this stage in the cycle. In the near-term emerging market volatility should diminish and over-sold markets are likely to rebound. Medium-term, those countries hardest hit by the recent crisis will languish until the inflationary effects of currency depreciations have fed through. In the Long Run, a number of emerging markets, Turkey included, offer value: they have demographics on their side. Originally Published in In the Long Run (We are now on your favourite messaging app – WhatsApp. We strongly recommend you SUBSCRIBE to start receiving your Fresh, Homegrown and Handpicked News Feed.)
The Narendra Modi government is nearing the completion of its term. Unsurprisingly, it is keen to list its achievements in the past four years and has deployed its entire machinery to spread its message across the country, writes Pradeep S Mehta. One of the key success stories propagated by the Government of India is regulatory reform or reduced regulation. It involves eliminating archaic laws and rationalizing existing laws. The objective is to optimize regulatory stock and flow to reduce regulatory burden on different stakeholders. This espouses the ideals of sabka saath, sabka vikas and “maximum governance, minimum government” conceptualized when the National Democratic Alliance came to power. These themes are now being merged into the slogan of “ease of living for all”, of which “ease of doing business” is an integral part. Since 2014, by way of four repealing and amending laws, the government has scrapped around 1,178 laws. Of these, approximately 335 were Acts which amended existing laws, 16 were Acts which repealed existing laws, and 758 were Acts which authorized appropriation of funds. Presumably, all these Acts had outlived their utility. In other words, only around 69 Acts were actually operational when repealed. By government’s own admission, most of the Acts repealed were irrelevant. They had ceased to be in force, or had become obsolete, or had lost their meaning, or their retention as a separate Act was unnecessary. The last repeal happened in 2015. In 2017, the government introduced two repeal and amending Bills to scrap around 239 Acts, of which around 101 are amendment Acts, 11 are appropriation Acts, 20 are repeal Acts and nine are ordinances. The Bills are yet to be passed. Repeal of inoperative legislations might not be the best tool for regulatory reform when the objective is to highlight it as a major achievement in making life easier for citizens or businesses. The utility is limited to reducing the thickness of the statute book. The government’s resources are limited and should be judiciously used. The efforts required in identification and repeal of such legislations may outweigh the benefits from such repeals. In addition to the repeals, in the past four years, the government has amended close to 65 existing legislations and has introduced 33 new legislations. Around 39 ordinances have also been issued during this period. A close analysis reveals that during the Modi regime, for every two relevant Acts repealed (total around 69), close to three new Acts (including amendment Acts) have been introduced (total around 98). This is not a record to be proud of, especially when deregulation is claimed to be one of the key success stories of the government. The issues which new Acts relate to include the goods and services tax, insolvency and bankruptcy, real estate, labour laws and financial sector, among others. While these Acts intend to address key problems and make life easier for stakeholders in relevant sectors, it appears that this is unlikely to happen soon. Interpretation, administration, compliance, and transition related challenges are keeping affected parties busy, resulting in high compliance costs. Even if prevailing issues are addressed, new issues are expected to crop up. Despite good intentions, the deregulation initiatives of the government do not appear to have had significant positive impact. This is because good processes are far more important than good intentions in a law-making process. Key components of a good law-making process are: Clarity in problem to be addressed/objectives to be achieved High likelihood of the proposed law of achieving such objectives The costs at which such objectives are achieved are likely to be substantially outweighed by the benefits Such ex-ante assessments of objectives, costs and benefits form the core of regulatory impact assessment (RIA) framework, a globally recognized good practice in law making adopted by different countries, including the UK, US and Australia. RIA can be applied for designing new legislations as well as reviewing the effectiveness of existing laws and designing amendments. It is as suited for legacy issues such as regulation of small and medium enterprises, as for emerging issues such as regulation of two-sided markets and network industries. For instance, the Government of Maharashtra recently issued the Maharashtra City Taxi Rules to regulate taxis linked with app-based aggregators. Utilizing the RIA framework, we estimated that if the rules are adopted, the per day cost to consumers and drivers may increase by 40% and 93%, respectively (details available here). Similarly, the Government of Rajasthan is considering amendments to the Rajasthan Shops and Commercial Establishments Act. Based on a rapid cost-benefit analysis, we found that the total net monetary cost to stakeholders is likely to marginally increase (details available here). Appropriate suggestions to reduce costs and enhance benefits were made in both cases. Several expert committees have recommended RIA for India. At present, the Better Regulatory Advisory Group (BRAG), chaired by the secretary, department of industrial policy and promotion, is considering adoption of RIA for India. As a member of BRAG, we have suggested a model for adopting RIA in India. The government should consider these suggestions to attain its deregulation agenda and ensure ease of living for all. Pradeep S. Mehta is secretary general of CUTS International. This article was originally published on LiveMint. (We are now on your favourite messaging app – WhatsApp. We highly recommend you SUBSCRIBE to start receiving your Fresh, Homegrown and Handpicked News Feed.)
Less than a year to the General Election is a tricky time for setting a stable Economic narrative. The government will hold no punches in glorifying its achievements. The opposition will skew comparisons against its own track record, preferring to affirm how things used to be “much better”. An objective analysis of forces shifting our economic realities is much wanting. An analysis which, when stripped of all embellishment, simply tells us... ...how are we really doing? I will humbly attempt to (at least) contextualize a few things. For starters, let us omit challenging the very purpose of an economic policy (i.e. I won’t question whether demonetization actually reduced black money. Would GST turn out to be a net positive? Whether RERA would bring or is bringing in more transparency in real estate?). Also excluded are comparisons across preceding political tenures. Why? While analyzing existential factors with a historical baggage is an intellectually stimulating exercise, I am more comfortable in presenting a more current, apolitical, and technical version of things, using data to highlight the actual state of the economy along with its expected trajectory. The logic stems from the reality that policy actions are already set in motion. Let us discuss their effects instead of their basis. So, What Are the Set Pieces Here? Interest Rates and Capital flows Chart 1 The most significant trend driving global economies since late 2007 has been an unprecedented drop in interest rates in the rich world. Be it Federal Reserve, the Bank of England, or European Central Bank (ECB), the combination of bond-buying and a deliberately loose monetary policy gave the rich world access to ridiculously cheap capital for a large part of last decade. Japan in the far east ventured towards negative rates in 2016 (joined by ECB) after suffering decades of stagflation, which technically meant investors would be charged for depositing their money in Japanese and European banks (Chart 1). Rates in major emerging markets, including India, were moving in the opposite direction, hitting highs from 2010 to early 2016. Rising domestic inflation, driven by increasing crude oil prices, supply chain inefficiencies, and a growing consumption base resulted in a high rate environment. This rate differential meant global capital flows in the early and mid-segment of last 10 years moved from the rich world to the emerging markets. Foreign investors were flocking to Asia hungry for yields, leading to significant rallies in domestic equity and bond markets. The last segment of the bygone decade has been different. Rich world interest rates (with the US taking lead) have been tipped to rise since 2016. The Federal Reserve has already announced its 7th rate hike in last 3 years. Europe will follow suit, albeit in a more gradual manner from 2019 onwards (Chart 2). Chart 2 Key emerging markets during the same period have begun to loosen monetary policy leading to rate reductions. The divergence of early and mid-decade is repeating itself, albeit now in the opposite direction (Chart 1). The result is a capital flight back to the rich world. The foreign investor flight seen in India is a case in point (Chart 3a, 3b). Chart 3a Chart 3b Though there are noises around monetary tightening coming back to the Emerging world (considering a second crude oil price rise in the decade with recent consecutive rate hike by RBI as a reaction) – capital outflow, especially in the Indian scenario, should not be expected to correct itself immediately. India would hence need to depend on domestic investors and liquidity to fund its growth. Crude Joke India sources 80%+ of its annual Crude Oil requirement externally, making us one of the largest oil importers in the world. Being a relatively price inelastic product, such an external dependence makes crude oil a key force driving our macroeconomic realities. Chart 4 Crude oil’s second price rise (Chart 4) brings with it another leg of rising trade and current account deficit (trade deficit hit a 61-month high in June) for the country. Domestic retail inflation is at a 5-month high. Interest rates are expected to go up. INR is at an all-time low. Assuming the upward (or moderately upward) trajectory of oil continues, is that a sufficient precedent to be worried? The Fiscal Deficit quandary The single biggest lever a higher oil bill can pull is to reduce the government’s appetite to spend. Our fiscal deficit is already widening thanks to petroleum subsidies etc. Petrol and diesel pricing pains can exert additional pressure on excise duties leading to further revenue loss. Another pain point is the rise interest payments on government debt. 10-year government bond yields have been continuously increasing (Chart 5) since the beginning of this year (due to a weakening Rupee, which is driven off other macro factors). These higher interest payments would only constrain government spending further. Chart 5 However, the present government’s commitment to fiscal consolidation implies there would be a hard stop at around the 3.3% FY19 target mark. Considering we’ve already reached more than 50% of the deficit target in the first 2 months of the fiscal means that the government would be severely constrained to drive further investment in the next few months (Chart 6). Chart 6 Slowing Investment And we do need investment, especially with a wave of capital outflow thanks to a rate differential with respect to the rich world as illustrated earlier. The country’s gross fixed capital formation (an indicator of investment) also corroborates with the low investment hypothesis we’ve already set (Chart 7). Chart 7 The US China trade war is only expected to accentuate other headwinds, including possibilities of moving to faster interest rate appreciation in the US (thanks to increasing prices due to push down of Chinese imports). Though Trump is pushing for a less aggressive rate hike plan, I don’t see the Fed suddenly change its trajectory. US unemployment is at an all-time low and corporate tax reliefs ensure equity investors stay bullish. The interest rate appreciation links to our capital outflow hypothesis and will also further weaken the Rupee. Private Sector to the Rescue? To assess whether the private sector can fill this capital shortage, it is key to see how some forward-looking indicators are panning out. A significant starting point may be to look at growth of credit across manufacturing, services, and agriculture. The underlying logic being that sectoral credit can be a proxy for investment appetite. Considering scheduled commercial banks still form the backbone of India’s financial ecosystem, this data can be quite revealing (Chart 8). Chart 8 Looking at sectoral credit growth as per RBI data, lending to both agriculture & industry has not really picked up. Industrial credit growth trend is mostly driven by large companies (Chart 9). Though already sluggish, if we break the numbers into its further constituents, it is visible how micro & small, and medium industries are hit even worse, with not much indications of recovery. Chart 9 Such a credit crunch, driven by the twin balance sheet problem plaguing India’s banking system, further accentuated through retributive actions against the banking community would be difficult to normalize. Short to Medium Term View There is not much to be excited with respect to the Indian economy in the short to medium term. Government spending is expected to stay muted, considering external headwinds such as a rising crude oil and an increased cost of funding. Government’s fiscal consolidation target is an additional constraint. Private sector investment looks no better, thanks to outflows expected to go up due to widening rate differential with respect to the rich world, as well as Indian banking system’s twin balance sheet problem crippling access to credit. RBI’s stress tests under its current macroeconomic outlook does not exude confidence, with an expectation of gross NPA of the banking sector to go further up from 11.6% this year to 12.2% by March 2019. Unless the government i) drops its pursuit of fiscal tightening and enhances spending to drive public investment, AND / OR ii) accelerates reforms with sound implementation around land, labour, and capital to spur private investment, it is fair to say that things look rather bleak. With the advent of an Election year, one can expect some progress on the spending side in an ad-hoc, populist manner. A splurge is however unlikely - given budget estimate for the full year would be aligned by February 2019 i.e. before the general elections. It is indeed wishful thinking to expect a complete wash out of the fiscal consolidation narrative right before hitting the polls. Worse, I expect no progress on ii) as that’s too long-term a strategy to reap any immediate benefit. Either way, from an economic perspective I don’t see anything aside from the status quo pan out and hence would continue to be a closeted Bear. Chart Data obtained from websites of concerned Central Banks and relevant Government departments. (We are now on your favourite messaging app – WhatsApp. We highly recommend you SUBSCRIBE to start receiving your Fresh, Homegrown and Handpicked News Feed.)
By Pushan Dutt, INSEAD Professor of Economics and Political Science. The WTO has played a greater role in the expansion of world trade than preferential trade agreements between small groups of nations. As president of the United States, Donald Trump has acted in forceful accordance with the wave of protectionist populism that swept him into office. One of his first major actions in the White House was the withdrawal of the US from the Trans-Pacific Partnership, and his subsequent moves have left transatlantic trade in limbo. Generally speaking, President Trump has shown himself more than willing to wield tariffs as a crude instrument in renegotiating trade agreements for more favourable terms for the US And if the president’s strategy succeeds, more countries may follow suit. If the preferential trade agreements (PTAs) that shape our current globalisation were to dissolve, there would almost certainly be economic fallout. The only question is, how bad would it be? World Trade Organisation rules would still apply to countries affected by shredded agreements, theoretically placing limits on trade barriers and adjudicating trade wars. However, researchers minimise the role of WTO membership in increasing bilateral trade flows. PTAs, in contrast, have been found to double bilateral trade within 10 to 15 years. These results seem to make sense, considering that PTAs usually extend beyond trade to issues such as intellectual property and labour laws. The deeper integration provided by PTAs presumably results in more fruitful trading relationships than WTO rules alone. But my recent working paper argues that we shouldn’t dismiss the WTO as a global trade catalyst. While PTAs are indeed more effective at firing up bilateral trading activity in the short term, the benefits of WTO membership dominate in the longer term. Trade over Time A central hypothesis of my study is that for a given pair of WTO member countries, the longer both are part of the WTO, the more business they are likely to do together. Therefore, unlike previous studies, my research measures the intensity of WTO ties between country-pairs over time. Working from an export-import database covering the time period 1948-2006 (i.e. the entire history of the WTO and its predecessor, the General Agreement on Tariffs and Trade (GATT)), I broke out the data by year to create time-specific variables measuring the number of years of WTO/GATT membership for every possible member pairing. I did the same for preferential trade agreements going back as far as the European Economic Community, formed in 1958. My analysis also accounted for all variables within each country over time (e.g. GDP, per capita GDP), and all time-invariant variables for pairs of countries (e.g. distance, shared language, colonial links). In keeping with my hypothesis, WTO membership’s average effect on bilateral trade is quite modest for the first decade, after which it increases substantially and consistently. PTAs, too, catalyse trade more strongly as they age, but in the long term the “WTO effect” is much greater. We can conclude that the sheer scale of the WTO, as well as its continual refinements over periodic rounds of trade negotiations, compensate for – and have come to dominate – the relatively shallow integration it provides initially, as compared to PTAs. Agreement Types The graphs above are based on aggregate figures, lumping together the various types of PTAs: bilateral (such as the agreement between U.S. and the South Korea), multilateral (e.g. ASEAN), and “deep” PTAs such as the European Union or the Common Market for Eastern and Southern Africa (COMESA). Performing separate comparisons for each of the three types, I found that the WTO’s impact handily surpassed bilateral PTAs in terms of bilateral trade, and gradually exceeded multilateral PTAs over the long term. Deep PTAs, however, had a stronger impact than the WTO for the first 40 years of membership, but their advantage began to erode in the fifth decade and beyond. Ultimately, the two could be considered comparable in their long-term effects. Developing vs. Advanced Economies The study also took into account the state of development of exporting and importing nations. Making this distinction helps clarify why WTO membership is beneficial for trade flows. Some have attributed the WTO effect to a reduction in trade policy uncertainty that conduces to more trusting and committed partnerships between countries. If WTO is about uncertainty reduction, one would expect to see a spike in exports to emerging markets in the years immediately following their admission to the WTO, which would taper off as those countries became more established. On the other hand, if the WTO effect is largely a product of developing markets gradually lowering their trade barriers, we should expect this effect to manifest slowly over time for exports into emerging markets. My study found no significant impact of membership for the first ten years. Thereafter, it found a gradual upward trajectory in trade activity, for WTO-member importers that are also emerging markets. Therefore, the WTO effect is less about uncertainty reduction. Instead, the data indicates that the WTO effect’s pace of growth is determined by how quickly developing economies phase in WTO compliance (which they are usually granted extra time to do). Further, the discernible impact of WTO membership was almost exclusively confined to emerging markets. Advanced economies, though, tended to have low trading barriers prior to becoming a WTO member, making it difficult to isolate and quantify the WTO effect. Nonetheless, advanced economies have benefited hugely from selling into gradually liberalising emerging markets joining the WTO. The WTO effect was at its strongest for emerging-market importers of goods from the developed world, surpassing the PTA effect by year 20, on average. Emerging economies also increased exports – both to emerging-market peers and to the rich world – following WTO membership. Margins of Trade I also dissected the WTO and PTA effects upon the extensive and intensive product margins of international trade. Growth along the extensive margin occurs when new goods are exported. The intensive margin tracks the value of goods traded in pre-existing arrangements. For the intensive margin, the PTA effect was stronger for the first 14 years but fell beneath the WTO in subsequent years. The extensive margin was no contest: The WTO effect dominated right out of the gate. Since most of the actions in shaping the growth of world trade has happened at the extensive margin, it appears that the WTO has played a pivotal role. Reassurance and Recklessness There’s a mixed message here for concerned Trump-watchers. On the one hand, this revisionist phase of globalisation may hold fewer horrors for the world economy than alarmists believe. If PTAs are withdrawn (e.g. a hard Brexit), the economic repercussions for trade in goods, while severe, might be short-lived. WTO membership may be more than serviceable as a long-term substitute. On the other hand, President Trump has reportedly raised the possibility of removing the U.S. from the WTO in private sessions with advisors. His public comments about the organisation have been nothing short of scathing, going so far as to refer to the WTO as a “disaster”. A draft bill called the “U.S. Fair and Reciprocal Tariffs Act” would empower the nation to disregard WTO rules and set trade barriers at will. A U.S. exit – either declared or implicit – would cripple the WTO’s legitimacy, possibly precipitating a collapse in global trade unlike anything we have ever seen. Pushan Dutt is the Shell Fellow of Economic Transformation and a Professor of Economics and Political Science at INSEAD. Professor Dutt directs the Asian International Executive Programme. Follow INSEAD Knowledge on Twitter and Facebook. This article is republished courtesy of INSEAD Knowledge. Copyright INSEAD 2018. (We are now on your favourite messaging app – WhatsApp. We highly recommend you SUBSCRIBE to start receiving your Fresh, Homegrown and Handpicked News Feed.)
This week saw an overdose of televised debates around India’s Petrol and Diesel Price woes with mouthpieces of BJP and Congress sparring at one another, the former blaming external issues such as a weakening Rupee and Crude oil, the latter holding the government responsible for economic mismanagement and a punishing tax regime. The battle of political parties quickly transformed into a battle of consultants with the BJP tweeting: And Congress demonstrating quick turn-around with: BJP’s social media cell made a gaffe, but Congress’s revert also isn’t factually robust. Their claim that International crude oil prices went down from $107 to $71 (i.e. -34%) whereas retail selling price of Petrol spiked by 13% during the NDA regime is partially disingenuous. These percentages are not comparable in the first place as International crude oil price reduction is shown in Dollar terms and appreciation of retail selling price of Petrol is shown in Rupees. And the Rupee has weakened considerably in between. Anyways… Ignoring the exact dates and numbers in the above Tweets, which are a part of political to-and-fro rather than a technical debate, let’s try to understand the core issue here. All you need to do is look at two points in time. March 2012 and present. Why March 2012? Because that is when International crude oil hit its peak in this decade. In March 2012, International crude oil bought by India was at $124/bbl. Presently it is at $72.5/bbl i.e. a drop of -41%. However, the Rupee has weakened by -38% during the same period thereby implying, adjusting for currency translation effects, International crude oil went down by -21%. Meanwhile, retail selling price of Petrol has gone up by 24% (from INR65 per litre in March 2012 to INR81 per litre at present)! What is going on? How can the price of Petrol increase, when the price of Crude oil, which forms the base of Petrol has gone down? The best way to decouple the drivers behind the Petrol’s price rise is to look at its value chain i.e. how Petrol reaches the end-user: Oil Manufacturing Companies (e.g. ONGC, OIL) produce or purchase crude oil from the domestic or international markets. This crude oil is then sold to Oil Marketing Companies (or “OMCs” e.g. IOC, BPCL, HPCL). OMCs get the crude oil refined into Petrol and make it reachable to the retail market i.e. people driving cars etc. After refined Petrol is extracted, it is transported to Petrol Stations. The Petrol Station is operated by a Dealer who makes a commission on every litre sold. Central government charges excise duty on every litre sold. State government charges VAT on every litre sold. Many Indian oil companies are vertically integrated with their own refineries, and oil marketing arms. There are some specialist companies who look at these value-chain links separately. The above-mentioned steps translate into their corresponding value chain line items as shown below: See below a detailed working to understand how each component adds up (figures as at 14th September 2018): Yes, Taxes (i.e. the Central Excise Duty and VAT) roughly comprise 45% of Petrol’s Retail Selling Price! With all other cogs of the math being stable, they’re the culprit. Reduce them, prices will stabilize. However, considering a significant proportion of Government’s revenue accruals come from Petrol and Diesel taxes, it is no wonder that the Centre and States are reluctant to take any decisive actions. Even bringing Petrol under GST would imply the maximum levied rate can be 28%, a far cry from the ongoing 45%. With a supposed hard stop on the 3.3% fiscal deficit target and an upcoming Election year, the customer may have to ride this one out. This will be a recurring column published every Friday under the title: “How to Make Sense of the Indian Economy”. (We are now on your favourite messaging app – WhatsApp. We highly recommend you SUBSCRIBE to start receiving your Fresh, Homegrown and Handpicked News Feed.)
Back in the 1980s, if you wanted to book a flight from New York to London, you would contact a travel agent, who would check availability, present options, receive your instructions, and then finally make a reservation. Today, you are likely to go online and book directly with the airline. What has happened here is a process known as disintermediation. The travel agent as an intermediary is no longer needed, writes John Hull. This does not mean that there is no need whatsoever for intermediaries in the travel industry. Online services such as Expedia and Travelocity have sprung up to assist when customers want to quickly compare prices between airlines or hotels. However, the nature of the intermediaries in the travel business has changed dramatically, and human involvement has largely disappeared. The creation of new technology-based intermediaries like Expedia and Travelocity is referred to as reintermediation. Disintermediation followed by reintermediation is a common pattern in technological change. Like the travel agents of the 1980s, banks and other financial services companies are intermediaries, and they are similarly in danger of having the services they provide disrupted. In this article I will discuss some of the ways in which financial services will be impacted by finance-related technology or ‘fintech’ going forward. For interested readers, a fuller discussion of emerging fintech innovations is covered in the recently released fifth edition of my book, Risk Management and Financial Institutions. Disruptions in Payment Systems Technology has already had a huge effect on the way payments are made. As a society, we have moved from cash and cheques to credit and debit cards to the use of mobile wallets. In some respects, developing countries have progressed even further in this direction than developed ones, in part because traditional payment systems were not as well established. Many fintech start-ups are offering new services, and some — such as PayPal, Apple Pay, Google Wallet and Alipay — are now large, well-established companies. The key attributes of a payment method are speed, convenience, security, simplicity and cost. As a result, services such as PayPal transfer funds almost immediately, and storing credit card-like information in an iPhone or similar device adds to the convenience for many consumers. Indeed, given the dominant position of Apple in the smartphone market, it has been natural for it to expand into payments, and some have speculated that it will not be long before Apple offers a wider range of banking services. One can imagine that wearables such as watches or bracelets — or even implants — may be used in the same way as smartphones to add to the convenience of making payments. Security is a major issue for all forms of payment. Tens of billions of dollars are lost each year from credit card fraud. Embedding chips as well as magnetic strips in cards helps, but does not eliminate this problem. We are likely to see big changes in the way fraud is avoided in the future. Already, digital wallets are considered to be more secure than credit cards, and many payment providers, including banks, are investigating the use of ‘biometric authorization’. Retinal scanning, facial recognition,voice authentication, and even heartbeat monitoring are all being considered. The costs of fraud are usually borne by the payments system provider, and are passed on to merchants in the form of fees. PayPal, for example, charged 2.9% plus $0.30 per transaction in mid-2017. Of course merchants, in turn, pass the fee on to consumers. Everyone therefore has an interest in reducing fraud, and approaches for making more secure payments should be welcomed. In India, making more people part of its financial ecosystem is an important objective that is laying the groundwork for a cashless society. Already, the government has issued biometric IDs (involving fingerprints and retinal scans) to over one billion people. These IDs have the advantage that some government benefits can be distributed with less involvement from intermediaries. Of course, some would argue that the provision of biometric information is an unacceptable violation of a person’s privacy, and this may slow down its acceptance in developed countries. Some payment systems allow users to borrow money. The interest rates charged by credit card companies are very high, but it should be remembered that users do get free credit for the period of time between a purchase and the next monthly due date. PayPal competes with this by offering 14 days of free credit. It is likely that more convenient credit facilities, tailored to the needs of users, will be developed. Through its subsidiaries such as Alipay and Mybank, Alibaba is already offering many of the same services as banks. What other services can be offered to make payment systems attractive? Many individuals remit funds on a regular basis to family members in another country, and the foreign exchange services associated with those transactions are likely to get more convenient and competitive. For businesses, easy-to-use foreign exchange hedging services that compete with those offered by banks are likely to be developed. Fintechs may also carry out sophisticated analyses of sales to help a company understand its customers better or provide accounting services. Of course, customers who prefer cash will continue to exist for some time. Some people have bad credit histories and do not qualify for credit cards, while others are too risk averse to give their credit card information to third parties. Amazon has recognized this and allows customers to open an account at selected retailers by depositing cash. When goods are purchased, the account is debited. Finally, one aspect of the digitization of payments is that it becomes much easier to collect data on a person’s spending habits. This could be useful to banks when making credit decisions. Knowing how a potential borrower spends money can be almost as important as knowing how much he or she earns. Disruptions in Lending In some large banks, loan officers are already being replaced by systems involving machine learning. Given enough data about a bank’s lending experience, it is recognized that a machine learning algorithm can sort good loans from bad as well as — or better than — a human being. In principle, a machine learning program can be more objective and exhibit less bias than a human. Elsewhere on the lending front, peer to peer lending (P2P) is gaining ground. This is the practice of lending money to an individual or business through an online platform that matches lenders with borrowers. Like the travel industry, peer-to-peer (P2P) lending involves disintermediation followed by reintermediation. Banks are no longer the sole intermediaries, and new intermediaries are being set up to provide services such as: Verifying the borrower’s identity, bank account, employment, income, and so on; Assessing the borrower’s credit risk and, if the borrower is approved, determining the appropriate interest rate; and Attempting to collect payments from borrowers who are in default. Many borrowers who use P2P platforms have already been refused by banks, so the interest rates can be quite high compared with conventional loans (but lower than the rates on credit card balances and other sources of credit for moderate- to high-risk borrowers). P2P lending platforms such as Prosper and Lending Club assign a credit rating to a borrower in much the same way that a bank does. Lending Club, for example, categorizes borrowers by assigning a letter grade between A and G. The interest rate charged to the less credit-worthy borrowers is higher than to A-grade borrowers, but the expected loss from defaults is also higher. Statistics published by Lending Club in June 2017 show that both interest rates and loan losses are higher than on most loans made by banks; however, the net annual returns that investors receive on average are quite attractive compared with other opportunities. The fees at P2P lenders can be quite high. At Lending Club, the borrower pays an origination fee typically between 1% and 5% of the amount borrowed. The lender pays a service fee (typically about 1%) on payments received and may also have to pay costs associated with collections on delinquent accounts. Some lending platforms can be criticized because they have no ‘skin in the game’. If loans do not perform as well as expected, the lender bears the entire cost. One exception is Upstart (started by former Google employees in 2014), which has a different model from Lending Club and Prosper. It charges borrowers an origination fee but does not charge lenders a fee. It uses the origination fee to reimburse lenders if a loan defaults, giving it a stake in the performance of the loan. Its credit assessments have proven to be quite accurate, and it has grown quickly. P2P lending has not been immune to scandal. The founder of Lending Club (which used an IPO to become a public company in 2014) had to step down in 2016 as a result of a governance scandal — but the company seems to have bounced back. And in China, retail investors have lost billions of dollars in incidents where P2P platform operators have simply disappeared with investors’ cash. This has led to a crackdown on the industry by Chinese regulators. All financial innovations are liable to have ‘teething troubles’ of this sort. Indeed, banks over their long history have had their fair share of scandals. The real question for P2P lending is whether it will make inroads into traditional bank lending. Will P2P lending become a widely used option for financing the purchase of cars and houses? Will P2P between corporations become more common? Because these platforms are relatively new, it will be interesting to see how they perform in an economic downturn or when interest rates increase. Disruptions in Wealth Management Wealth management has traditionally been very profitable for banks. Fees are often in the 1% to 1.5% range of the amount invested per year and can be much more when hidden fees associated with mutual fund investments and trading costs are taken into account. Once a client’s risk appetite has been assessed, wealth management involves finding appropriate investments for the client. John Bogle took the first step toward reducing the costs of investing with the first index fund in 1975. Index funds have since become very popular, charging fees as low as 0.15% with no human intervention required in the form of a wealth manager. Robo-advisors first appeared in about 2010. In most countries they must register with the authorities and are subject to regulation. Robo advisors like Wealthfront and Betterment provide digital platforms where investors express their risk preferences. A portfolio is then chosen, and going forward, is automatically rebalanced as necessary. There is very little human intervention, and fees are lower than those charged by traditional wealth managers — typically 0.50% to 0.75% of the amount invested per year. Some banks and other wealth managers are now responding to this competition by offering their own automated wealth management services. Indeed, those that fail to do this are unlikely to survive. Providers of index mutual funds, such as Vanguard, are also active in this space. Robo advisors are making investment advice available to a much wider range of individuals. Investors can start with as little as $500 or $1,000 — whereas a traditional wealth manager might require a minimum investment of $50,000. In its early days robo-advising tended to attract young investors with small amounts to invest, but a much wider range of investors, including those classified as ‘high net worth’ and HENRYs (high earners not rich yet) are now using these services. Robo advisors make it easy for clients to add to their funds under management on a regular basis. Arguably they serve an important role in society by encouraging people to save when they might not otherwise do so. Until now, the main innovation underlying robo-advising has been the delivery of services in a cheaper, novel way that many investors find appealing. The investment strategies underlying the advice given are usually similar to those that have been used by the investment industry for many years. Tax-related strategies (such as tax-loss harvesting) are often incorporated into the advice that is given. There is plenty of scope for these strategies to become more sophisticated: Investments can be better diversified internationally and across sectors; and they can be better targeted to the goals of the investor, taking into account the investor’s age, retirement plans, etc. In 1992, Fischer Black and Robert Litterman at Goldman Sachs published a widely used way of incorporating the views of investors in the selection of a portfolio. Robo advisors may find ways of expanding the range of alternatives offered to investors using this technology. Alternative sets of views with rationales could be presented, with investors being invited to choose between them. It might even be possible to let the views of the investor be a less structured direct input to the determination of the portfolio. Human investors are subject to numerous biases: They are reluctant to sell losers, they chase trends, and they get disillusioned and exit equity markets when they should stay for the long term. It is often the ability to avoid these biases that distinguishes a professional investor from an amateur. Robo advisors could try to stop investors from falling victim to these biases by developing innovative ways of explaining them. Finally, roboadvising could be combined with other financial innovations so that a percentage of a client’s funds is allocated to P2P lending or equity crowdfunding. Robo advising has already become an important part of the financial landscape and is likely to become more widely used as the millennial generation accumulates wealth. For this generation, it is much cooler to invest with an iPhone than make a trip to the bank. However, it is worth sounding a note of caution: Equity markets performed really well in the years following the start of robo advising in 2010. Its appeal may decline when there is a downturn and the clients of robo advisors — many of whom have never invested before — complain about losing money. It is hoped that these advisors will be able to educate investors on the importance of staying focused on the long term. How Financial Institutions Should Respond Banks must carefully evaluate how consumer behaviour is being affected by technological change — and take steps to change their business model accordingly. Eastman Kodak is one company that did not survive technological change — even though it was aware of the changes taking place in its industry. Indeed, the first digital camera was created in 1975 by a Kodak engineer, and the company invested billions in the new technology. Where did it go wrong? While the company understood the new technology, it failed to appreciate the way it was changing consumer behaviour until it was too late. Kodak coined the term ‘Kodak moment’, which it used extensively in its promotions to convince people that they should always have a camera on hand loaded with Kodak film, ready to capture important moments. Some would argue that the company could have extrapolated from its sales pitch to recognize the actual business it was in: Kodak was in the imaging or moment-sharing business, not the film business. Its implicit belief that demand for hard-copy photographs would continue ultimately doomed it. The disruption of large financial institutions does not seem to be happening as quickly as that of Kodak, and banks have a number of competitive advantages: They are well capitalized (although the same is true of Apple, Google and Alibaba); they understand how to deal with the highly regulated environment they operate in (something many fintech start-ups find difficult); and they have a huge customer base that mostly trusts them (although the 2008 financial crisis eroded that trust). One can speculate that financial institutions are not as vulnerable as Kodak in that many people are less inclined to experiment with the way their money is handled than with the way they take photos. Also, many start-ups need established financial institutions to offer their products. However, there are some important warning signs that banks should respond to. The Millennial Disruption Index survey indicated that 71% of millennials in the U.S. would rather visit the dentist than listen to what banks are saying, while 73% would rather handle their financial needs through Google, Amazon, Apple, PayPal or Square. Millennials also voted four leading U.S. banks among their ‘least- loved brands’. Kodak was ultimately rendered irrelevant by the digital cameras incorporated in smartphones and naturally, financial institutions do not want to become similarly irrelevant. Already, they have recognized the need to offer mobile apps for payments, wealth management and a host of other services; but it is important for them to embrace technological change itself, not just to pay lip service to it. The fact is, technological change in the financial sector will continue at an accelerating rate, and in many cases it will erode the profits banks previously relied upon from their traditional activities (as was the case for Kodak). Being flexible enough to adjust will be a continuing challenge. The new services developed by banks need to be convenient and designed so that young people classify them as ‘cool’ while older people find them easy to use. Some financial institutions have developed new services in-house; some have bought start-ups that have already developed the services; and some have entered into partnerships with start-ups. The first alternative — although the least expensive and most appealing to many in the financial sector—can be quite difficult, given the complacent culture that often permeates large companies. The second and third alternatives can be used as a way of disrupting the culture and accelerating change. Some banks have found it useful to create an organizationally distinct unit that has the ability to bring in outside talent when necessary and can partner with start-ups. In Closing The banks that survive the disruptive forces described herein will have to cut costs by making big reductions in the number of branches they run and the number of people they employ. To keep the services they offer up to date, they will have no choice but to form partnerships with many different technology firms. In the realm of financial services, one thing is certain: There is no avoiding the growing wave of technological change. John Hull is the Maple Financial Chair in Derivatives and Risk Management, University Professor and Professor of Finance at the Rotman School of Management. He is Co-Director of the Rotman Master of Finance program and the Rotman Master of Financial Risk Management program. He is also a co-founder of FinHub, a Rotman initiative for education and research in financial innovation. The 10th edition of his book, Options, Futures, and Other Derivatives (Pearson) was released in January 2017 and the fifth edition of Risk Management and Financial Institutions (Wiley) was released in February 2018. This article originally appeared in Rotman Management, published by the University of Toronto’s Rotman School of Management. For more, or to subscribe: www.rotmanmagazine.ca (We are now on your favourite messaging app – WhatsApp. We highly recommend you SUBSCRIBE to start receiving your Fresh, Homegrown and Handpicked News Feed.)
The 6th of September 2018 will be remembered as a landmark day in the history of jurisprudence in India. The Supreme Court, the highest body tasked with the interpretation of the Constitution of India and associated laws, struck down the colonial era Section 377 of the Indian Penal Code which criminalized same sex relations. There has been enough written about 377 itself, and why it made sense for it to be repealed in modern society, but it is also important to look at the structure of the decision making process of the Supreme Court. What really happens when such a provision in law is challenged? Can we challenge any and all laws? Can we go directly to the Supreme Court if we feel aggrieved? How does the Supreme Court decide if a law is good or bad? What happens after the judgment is made? This article will attempt to answer some of these questions, and hopefully help you understand how laws affect you and society at large. On 9 December 1946, representatives of the Indian provinces, princely states and chief commissioners provinces met together for the first time as the Constituent Assembly of India. Their task - draft a Constitution which would underpin the democratic exercise in a soon to be independent country. On 26 January 1950, the longest written Constitution in the world came into effect - concluding a remarkable exercise which produced an even more remarkable document thus setting the course for our democracy. Fundamental Rights One of the foundational parts of the Constitution is Part 3 (Article 12 - 35) which deals with Fundamental Rights. These include individual rights and also remedies if these rights are violated in any form. The fundamental rights are (for an in depth and word to word reading go here) Right to Equality (Articles 14-18) Article 14 - Equality before law and equal protection of laws Article 15 - Prohibition of discrimination on grounds of religion, race, caste, sex or place of birth Article 16 - Equality of opportunity in matters of public employment Article 17 - Abolition of Untouchability Article 18 - Abolition of Titles Right to Freedom (Articles 19-22) Article 19 - Guarantees six freedoms - freedom of speech, peaceful assembly, forming associations, freedom of movement throughout India, to reside in any part of India, to practice any profession Article 20 - Protection in respect of conviction for certain offences Article 21 - Protection of life and personal liberty Article 21A - Right to Education (added recently after enactment of the Right to Education Act) Article 22 - Protection against arrest and detention in certain cases Right against Exploitation (Articles 23-24) Article 23 - Prohibition of trafficking in human beings and forced labour Article 24 - Prohibition of employment of children in factories etc Right to Freedom of Religion (Articles 25-28) Article 25 - Freedom of conscience and free profession, practice and propagation of religion Article 26 - Freedom to manage religious affairs Article 27 - Freedom as to payment of taxes for promotion of any particular religion Article 28 - Freedom as to attendance at religious instruction or religious worship in certain educational institutions Cultural and Educational Rights (Articles 29-30) Article 29 - Protection of interests of minorities Article 30 - Right of minorities to establish and administer educational institutions Right to Constitutional Remedies (Articles 32-35) I’d suggest you read the above list twice, because only then will you start to realize the importance of these basic rights today. In 1950, they were nothing less than revolutionary - giving women and minorities equal rights, and allowing everyone to vote. In contrast America only gave African Americans the right to vote in 1965, a full 15 years after Indians irrespective of caste, religion, sex, economic and literary barriers came together for the largest democratic exercise in history - the first elections to the Parliament. What you will also realize is that a lot of these rights are subjective - for example what does Article 21 - the right to life and personal liberty - actually mean on the ground? For all their path breaking ideas, our Constitution makers preferred not to get into details, leaving it to the wisdom of future generations to figure it out for themselves. In case of any confusion, the Supreme Court is the final authority on what each word of the Constitution actually means on the ground. Hence the exalted position that the SC holds in Indian polity. If a citizen feels that any of her fundamental rights have been violated by the State, they can directly approach the Supreme Court. This is a vast and unabridged power - the SC is a direct protector of the citizen’s fundamental rights. This now leads us to our next question - once the SC is approached, how does it decide whether a law is good or bad? The Court primarily relies on the Constitution itself and interprets the provisions vis-a-vis the laws. Any law that is held to be against the Fundamental Rights is automatically struck down. Let’s take the example of Section 377. A law that criminalizes sexual relations between two citizens has been held to be against Article 14 (right to Equality), and Article 21 (right to life and personal liberty). In addition, the Court also ruled that since the Right to Privacy was held to be a part of the right to life and personal liberty earlier this year, the right to bodily privacy and sexual autonomy was a natural progression. Any law that restricts homosexuals from their natural actions will act against their right to equality, and right to life and personal liberty. This is the key to Section 377 being struck down. “It typecasts LGBTQ individuals as sex-offenders, categorising their consensual conduct on par with sexual offences like rape and child molestation. Section 377 not only criminalises acts [consensual sexual conduct between adults] which should not constitute crime, but also stigmatises and condemns LGBTQ individuals in society,” Justice Chandrachud said. Right - so that’s to the death of Section 377 (which no government in power has opposed in Court ever - a stand which the Court criticized). But here’s what’s even more interesting - there are more cases being heard in Court over the next few weeks which will stretch the interpretation of these Fundamental Rights to the limit. One is a petition to allow women between the age of 15-50 to enter Sabari Mala, a shrine in Kerala where women have not been allowed - theoretically this does violate Article 14 (the right to equality) of women since they are treated differently. Another one is on the validity of Aadhaar - does the implementation of a nationwide scheme like Aadhar and its compulsory use for various services violate the right to privacy (part of Article 21)? Really big days ahead for our democracy. Fingers crossed. What Should You Take Away From This Long Article? You as a citizen have fundamental rights guaranteed to you by the Constitution, which are protected by the Supreme Court. This is an extremely powerful provision, and to be aware of what these rights imply is the first step to being an informed citizen. I leave you with a couple of quotes from the judgment which underpins what our Constitution and democracy is all about. “Morality cannot be martyred at the altar of social morality. Only Constitutional morality exists in our country.” “Majoritarian views and popular views cannot dictate constitutional rights. LGBT community possesses human rights like all other sections of society. Equality is the essence of the constitution. 377 is arbitrary.” More nuggets here. Highlights from the verdict. You can subscribe to my weekly letter series titled "Policy & Governance for Dummies" by clicking here. View the letter archive by clicking here. (We are now on your favourite messaging app – WhatsApp. We highly recommend you SUBSCRIBE to start receiving your Fresh, Homegrown and Handpicked News Feed.)
Good education is the ultimate leveler and the most significant driver of wealth and prosperity. Data from the National Family Health Survey (NFHS) makes a solid case after surveying more than 600,000 Indian households in 2015-16. Source: NHFS Unit-Level Data As evident, there is a clear correlation between education and prosperity. People and institutions know that. Hence it shouldn’t come as a surprise that good education is a costly business. Many families hence, especially poor and middle-income households depend on banks to ensure their children can make their economic leap. Tuition fees, especially for professional colleges, can range in multiples of lakhs, making access to credit essential. Even though our banking system has lately not done any favours to this sector (considering the depressed monthly growth as shown in the below chart), education’s aspirational value and importance cannot be understated. Source: RBI Data Thereby, I will now attempt to do a deep dive into how Education Loans work and how you as a consumer can benefit from them. What? The Education Loan is a product which can help you fund your higher education in India or abroad. They form a part of Priority sector lending targets as set by the RBI. They can be used to finance a wide variety of courses, be it graduation, post-graduation, vocational courses, and other certificate courses. It is a loan Secured over guarantees and for larger amounts an asset of the Parent/Guardian (who acts as a co-borrower). How? Maximum loan amount sanctioned depends on the type of educational institution the applicant is headed to. For premier institutions banks can sanction amounts up to INR40L. Banks often ask for co-applicants to fund part of their requirement through a down-payment (or “margin money” in banker parlance). There are specialist products available for studying abroad as well e.g. from financial institutions like HDFC Credila. The loan is to be repaid as Equated Monthly Installments (EMIs) over the duration of up to 15 years (“loan period”). An EMI plan essentially spreads the total principal & interest due equally over the loan period and is chargeable on a monthly-basis. What Interest Rate? Like car and home loans, the EMI is calculated based on the principal to be borrowed, the applicable interest rate, and the loan period. The applicable interest rate is set by the bank and is usually “Floating” in nature for Education Loans i.e. it changes throughout the loan period subject to RBI rates. This interest rate depends on individual factors: The institution you’re headed towards to study College fees & other expenses Credit score/history of Guarantor and/or a tangible collateral as security (e.g. house, plot of land, a fixed deposit etc.) Past academic record Macro factors primarily comprise the benchmark interest rate in the country which in turn influences all consumer facing interest rates, as explainer earlier. You can check an online loan marketplace to get a sense of the applicable interest rates. They are usually expressed on an annualized basis. The floating rate is usually structured as: 1-year MCLR + Spread In layman terms, MCLR or “Marginal Cost of Funds Based Lending Rate” is the minimum allowed interest rate below which a scheduled commercial bank or NBFC is not allowed to lend. It is fixed by the Reserve Bank of India (RBI) and is closely tracking the short-term interest rates set by the Central Bank. Floating interest rate, as the name suggests is not constant, and is “Floating” during the loan period depending on RBI’s monetary policy actions. They ensure borrowers can benefit from any rate reduction exercises by the RBI after they have already taken the loan. The additional Spread will include the margin that the lending bank would make. Other Charges? There is usually no processing fee, no prepayment charges, or pre-closure charges for Education Loans. Loans for studying abroad are structured differently and may have certain processing charges etc. Things to Watch Shorter is the loan period, lower would be the interest rate applicable A higher down-payment will result in a lower interest rate Do check when the loan repayment schedule kicks-in. Usually it starts 6-12 months after completion of one’s degree. Interest however would accrue during the moratorium period (time during the loan term when the borrower is not required to make any repayment), thereby it is better to start repaying as soon as one can Banks may push the co-borrower/parent to take a Life insurance cover in addition to the Education Loan. This is usually not mandatory but is often used as criteria by banks to approve/reject an application. There have also been instances where the bank has wrongly pushed its own insurance products on customers taking Education Loans Interest being paid is allowable as tax deduction from total income under Section 80E. There is no tax benefit on the principal part of the EMI This will be a recurring column published every Friday under the title: “How to Make Sense of the Indian Economy”. (We are now on your favourite messaging app – WhatsApp. We highly recommend you SUBSCRIBE to start receiving your Fresh, Homegrown and Handpicked News Feed.)
Dear readers, over the last couple of months we have discussed the basics of living a healthy, fit and balanced life. We have closely examined topics such as the right diet plan, the appropriate weight loss exercise and the keto diet. Busted popular myths around breakfast ideas, eggs and dairy and much more. The next leg would have us discuss everything you need to know about exercising right. But before we do that, this week I have attempted to answer some popular queries which have popped up over the course of these months. Diet 1. Are three major meals i.e. a slightly heavy-healthy breakfast, a moderate lunch and a light dinner, enough? Should there be absolute no to snacking? Is there any way to improve metabolism or is it all constitutional? Three meals a day are enough for normal adults; occasional snacking is also acceptable. Also, to ensure that the routine is sustainable, you can include one cheat day a week when you are free to eat anything you fancy. 5-6 ‘small’ meals are neither healthy nor required by the body; 2-3 daily meals should be enough to make us comfortable through the day. 2. Is it okay to pursue a small frequent meal plan if one only takes low carb snacks? Most snacks are high carbs so it is difficult to execute an effective small frequent meal plan. Secondly it is important to ensure that one’s insulin levels are low for insulin resistance to decrease. From that perspective, fasting or long gaps between meals are better. To the best of my knowledge, there are no studies supporting a weight loss effect with frequent meals. 3. Isn’t prolonged fasting unhealthy? Doesn’t it lead to slowing of metabolism? A potential downside of long-term fasting is the rate of detox. Fat is the body’s storage organ for everything, including any toxins that may have accumulated over the years. When you lose weight, all these toxins have to be removed through your bloodstream, which can be extremely uncomfortable. During fasting, these symptoms are even more pronounced, since the rate of fat burning is so rapid – many people feel nauseous, sick, or otherwise unwell. That’s why it’s better to ease into fasting rather than jumping into it. One can start with a meal-free interval at night for 10-12 hours, and then increase it gradually to become comfortable with the new plan; gradually longer fasts become comfortable. One can then choose between a 16/8 diet plan (16 hours fasting and a 8 hours feeding window per day) 1-2 days per week or on most days of the week, or a 5/2 program (5 days normal diet, 2 days of fast with < 600-800 calories), depending on one’s goals and tolerance. It’s a great method to kickstart fat loss if one is stuck on a plateau, as often happens when one tries to restrict calories. Research suggests that intermittent fasting has little negative effect on one’s metabolism compared to traditional dieting. Evidently the metabolism slows down much more in response to prolonged low calorie diets than to intermittent fasting as outlined above. The reason why many think intermittent fasting improves metabolism is due to less loss of lean body mass and greater fat burning. It's impossible to lose weight without losing a little lean body mass, but research suggests that a lower percentage of lean body mass is lost when losing weight with intermittent fasting than with traditional dieting. Preserving more lean body mass means the body's calorie-burning slows less. At the same time, short fasting periods cause the body to tap into fat stores and burn a greater percentage of fat mass for energy. 4. Why can’t I follow Keto diet all the time? I gain weight every time I go back to a normal diet? A ketogenic diet could be an interesting alternative to treat certain conditions, and may accelerate weight loss. However, it is often hard to follow a Keto diet in the long term because of the heavy consumption of meat and fats involved. Long-term research on the keto diet is limited, so there’s no telling for sure what cutting out certain major food groups and cutting carbs will eventually do to your body. Registered dieticians warn that nutrient deficiencies may be possible if you’re on it for too long. Further, it is very hard to give up carbs completely for the rest of your life; sooner or later, one is tempted to cheat, which leads to raid weight gain. 5. Are bananas fattening? Not really. Bananas are rich in fiber, carbs, potassium and other vital vitamins, while being low in protein and fats. However, most of the carbs in a banana are in the form of sugars – Fructose, glucose and sucrose. Bananas are extremely rich in fiber, which help in reducing weight, because intake of adequate amount of fiber helps you feel full for longer, which helps to reduce intake of calories in the long run. 6. How many eggs should I consume in a day and in what form? How can vegetarians substitute egg in their diet? It is quite safe to eat an Egg daily, even two. If one regularly consumes more than 1 Egg a day, it should be in the setting of an overall healthy diet and lifestyle. Studies are available for regular consumption (for a few months) of upto 4 eggs a day-which appear to be safe. Vegetarians can take other sources of healthy protein and fat, like milk, curd, cheese, nuts and seeds. 7. How many eggs in a week and in what form would you recommend for heart patients who have undergone PTCA (bypass surgery) or CABG (angioplasty) or are on medicines but leading a normal lifestyle otherwise? The currently available data on safety of eggs is 2-4 per day, which has been shown to have no major effects on the lipids. No data is available for >4 eggs so far. So, higher consumption should be selective, in the setting of a healthy lifestyle and in consultation with a doctor. And post PTCA or CABG patients can consume eggs in a similar quantity, as they are not associated with risk of heart attacks and may lower the risk of stroke, especially hemorrhagic stroke. 8. Could you throw some light on the GM diet? The GM or General Motors diet was promoted earlier, eventually turning out to be a damp squib. It requires eating only one type of food per day (e.g. only vegetables except potatoes, only fruits except banana or only bananas and milk or only meats). One is supposed to lose up to 7 kgs in 7 days, with the diet to be repeated with 1-week intervals. It is unlikely to be useful in the long run and is difficult to sustain due to its very restrictive nature. Medical benefits could accrue from the heavy consumption of fruits and veggies which is advisable even otherwise. Exercise 9. How crucial is the role of exercise in maintaining a healthy physique? Exercise plays a crucial role in maintaining a healthy physique. Exercise helps to burn calories, even when you are resting, as exercise increases your metabolism rate. Regular exercise maintains the health of your heart and blood vessels which makes sure blood is pumped efficiently throughout the body. Without exercise, the body will slowly lose bone mass and muscle mass after the age of 35 (at about 1% per year), which makes the body frail in the long run. Exercise also maintains hormone levels in the body and reduces the risk of developing any cancers. 10. Could you throw some light on High-intensity interval training High Intensity Interval Training, also known as HIIT, is a very effective way of burning fat quickly while adding muscle (if you wish to do so). HIIT helps build aerobic and anaerobic endurance (Aerobic endurance is endurance to do exercises which can be done under normal oxygen supply like cardio; anaerobic endurance is endurance to do exercises which need more oxygen than required and can cause loss of breath like sprinting, rock climbing etc) as well. The idea of HIIT is to perform small, explosive workouts with minimal rest time in between with a few rounds in total ( around 8-10). The workout-to-rest time ratio can vary from 1:1 (30 seconds each) or 3:1 (45 seconds:15 seconds) depending on your endurance. Weightlifting can also be done with HIIT protocols where a single work set of an exercise is done to failure. In the next section, we shall have full article on HIIT to clarify it’s nuances further. 11. Morning exercise regime or evening exercise regime-which one is best? What really matters is what exercise you do (And what follows it). It won’t help that you do a great workout in the morning and follow the day with sugars, fats, etc. However, there are some minor advantages. Morning workouts produce more testosterone, more fat loss (by 20% almost) and induces a better sleep at night. Evening workouts enable maximum strength and more anaerobic activity in the body. Hence morning workouts are better for weight loss, while evening workouts are better for strength. 12. How many hours a day exercise should be done? If you wish to attain basic physical fitness, 30 minutes of exercise per day is required. However, if you wish to add more body goals like losing weight or adding muscle, more time can be added. According to Department of Health and Human Services (USA), one should do 150 minutes of moderate aerobic activity per week, or 75 minutes of vigorous aerobic activity per week. We shall discuss exercise protocols at length in the next few weeks. Breakfast 13. Can paranthas made of non-wheat flour (like chana, bajra, jwar, soya) be considered healthy? Is Besan Chilla a healthy breakfast option? What about Idli and Dosa or Poha? Paranthas are like other foods made of wheat – moderate to high GI, but this is lowered by adding vegetables, oil and butter. Occasionally they are acceptable but not advisable for daily consumption. Other non-wheat flours are definitely healthier, one can even lower the GI of wheat by mixing bran or some of these flours and have reasonably tasty but less unhealthy rotis. Besan chilla would be much better option when compared to paranthas and bread. Besan has a lower GI and more nutrients. Definitely, a good choice. The glycaemic index of Idli, Vada and dosa is in the 65-70 range – not as healthy as usually claimed. However, eating them with sambhar lowers the effective GI of the meal due to protein and vegetables. The GI of rice is high around 70. I haven’t been able to find the GI of poha, but it will be somewhat lesser owing to the added ghee / oil and veg or peanuts. The risk of diabetes is higher with fresh juice as mentioned above, so fresh fruits are to be preferred over juices, whether fresh or canned (even worse). 14. If cereal and bread are bad, what do we eat for breakfast? Popular carb-rich breakfast comprising cereals, bread and juices should be avoided; eggs, dairy, salads, sprouts, whole fruits, nuts and seeds are much better options. Tea and coffee can be safely consumed (best taken unsweetened and black), along with water. Sugar 15. I am diabetic. Do you advise the use of stevia as a substitute for sugar? Is the intake of diet coke advisable? Stevia is better than sugar and other sweeteners and can be used occasionally. Largely, it would be better to avoid sweets (except the cheat day) to get over the sweet taste. Generally, all sweeteners promote insulin resistance (with the possible exception of stevia) and therefore are bad for diabetics and overweight people, both of whom have insulin resistance. Diet Coke or similar soft drinks are therefore not advisable. 16. Are potatoes, which are considered complex carbs, okay for consumption as far as their Glycemic Index (GI) is concerned? Potatoes are technically complex carbs, but get broken down in our body to glucose effectively. So, their GI is very high unless they are consumed with lots of other vegetables and oil. 17. How much carbs should I take in a day? The amount of carbs one can take in a day depends upon one’s carb sensitivity and activity level. So the intake will depend upon age, gender, current body weight and activity levels, apart from one’s dietary goals. Thus, if one is slim, active and young, one can afford to enjoy carbs and get away with it. However, if one is overweight, diabetic, sedentary and/or over 40 years of age, it is prudent to restrict refined carbs as discussed in earlier articles. Family history is important too; if everyone in the family is overweight it means that they have insulin resistance and should restrict refined carbs. As discussed earlier, complex carbs like salads, green leafy vegetables and a moderate consumption of fruits is advisable for everyone on a daily basis. 18. What are your views on statins? Statins are very effective cholesterol lowering drugs. They are proven to be very useful in lowering the risk of heart attacks and strokes in people at high risk, especially those who have already suffered some such event in the past. However, they should be advised wherever appropriate for the proper indications. Recently, lots of controversies have been raging on social media about their possible harms, including risk of liver and muscle damage (which are rare) and diabetes (which is uncommon). Here, we have to understand a disconnect: the restriction of dietary fat is not proven to lower the risk of heart disease, but lowering cholesterol levels with statins is proven to reduce the risk of heart disease in high risk individuals. I hope that makes the point clear. Oil 19. Is the use of virgin coconut oil in meals advisable? Is the use of desi ghee as cooking oil healthy? Coconut oil has become controversial due to its rich saturated fat content. There are no concrete studies showing harm associated with it, but none showing safety either, we have to be careful. For years, fat in general and saturated fats in particular have been demonized in dietary guidelines, but recent reviews reveal that there is no solid data proving the association of saturated fat with heart disease, and even lesser data demonstrating benefit with restricting fats. So, my suggestion would be to use it occasionally, especially for frying (as it has a high smoking point). Some data is coming up regarding its benefits in delaying senile dementia, though this is yet to be proven. Desi ghee is ok for frying once. The trouble is that repeated frying (a common behaviour among Halwais) leads to increasing generation of trans fatty acids, thus increasing risk. Occasional consumption of butter and ghee is acceptable, as discussed in the article on cooking oils. 20. How many fish oil capsules one can safely have in a day? Fatty fish is the variety of fish which is healthy for the heart. Since this variety is often not available, one can consume fish oil capsules or Krill capsules instead, in the dosage mentioned in the prescribing information. This is a recurring column published every Sunday under the title: What is Nutrition. Stay tuned. (We are now on your favourite messaging app – WhatsApp. We highly recommend you SUBSCRIBE to start receiving your Fresh, Homegrown and Handpicked News Feed.)
N.B. It is suggested the reader reviews a prior article in this series which throws light on various diet plans available before reading this piece. Which Diet Plan is the Best? Last week, we discussed as many as 10 different diet plans – some at length and some briefly. You would have noticed some overlaps across recommended dietary regimes. That’s because the basic physiology of fat loss is clear: Lower the insulin response to the food consumed, avoid chemicals and toxins, exercise regularly. Reward - A Healthy Physique. Except for the low fat and the Military diet, all the diets previously mentioned focus on reducing the glycemic index of food without limiting the intake of calories significantly. The Ornish diet also reduces the glycemic index of food, while restricting fats, thus curtailing calories. Calories are gradually curtailed naturally in all effective diets, even when not counting them. Eating a meal rich in healthy fats and proteins is very filling, and inhibits snacking for at least 6 hours or so (it takes the body about 8 hours to digest fats, 6-8 hours to digest proteins and just 2-3 hours for carbs). As one is full for a longer duration, the awareness of appetite improves: it is easier to eat when hungry, rather than by the clock every couple of hours. Tea and coffee (unsweetened and with a small amount of milk or creamer) is allowed in all the diets, large quantities of water are recommended and alcohol is limited. Most diets discussed have similar outcomes – there is an initial phase fat loss, followed by a slow creeping up of weight over the next 1-2 years (usually more than half the lost weight), which is why reportedly only 5% people can maintain any substantial weight loss over 2 years. This dismal figure has improved somewhat over the years (some sources claim it is now close to 25-30%, still nothing worth writing home about) with the guidance of doctors, nutritionists, dieticians, gym coaches et al. Largely, our inability to resist carbs long term sets the trap; sooner or later, one starts cheating – occasionally, then more often, and soon one is back to square one. This is where intermittent fasting comes in. Most of us know what to eat, whether one sticks to these desirable foods or not is a different question. The question which most diets fail to answer (or perhaps, ask) is – When should we eat? Should it be every couple of hours to keep a steady blood glucose, or should it be substantial, but infrequent meals? The answer has been discussed at length earlier. Briefly, frequent meals don’t allow insulin levels to fall low enough for fat burning to occur, hence the meals should be filling and infrequent (at most, 2-3 per day). To keep the blood sugars stable and low, the quantity of carbs (especially refined carbs) should be reduced, while healthy fats and proteins should be added. However, some carbs should be allowed, as total abstinence from them is neither required nor useful. The Achilles’ heel of most diets is that they are restrictive. Low calorie diets lead to lasting changes in the hormone levels in blood that slow down metabolism (causing fatigue and lack of energy) and increase appetite, even as late as 1 year after being on a diet. Exercise is hard to maintain in this scenario; sooner rather than later, one breaks and falls from the diet. Hence, the tough goals in constructing an effective and lifelong diet plan are to ensure that the diet: Is adequate, and not low in calories so as to keep hunger promoting hormones low, providing enough energy for work and exercise. Has some intake of carbs combined with a generally low consumption of refined carbs. Is Easy to follow long term and not extremely restrictive food choices. In the light of these goals, which are the most healthy, nutritious and satiating diets? Probably, they are the Mediterranean, the Pegan and the Warrior diets. These don’t restrict calories, allow a large variety of healthy and filling foods, and are somewhat easier to follow in the longer term. For quick weight loss, a brief period of Keto diet/Atkins’ 20 is very useful, though these are hard to continue long term. Synthesising the best features of the above 3 diets, I had suggested a diet plan in the beginning of this series. This is a relatively low carb, moderate protein and adequate fat diet, which tries to achieve the following objectives: Palatable, healthy and filling, so that 2-3 meals are enough with little need for snacking. Should work for vegans, vegetarians and non-vegetarians. Less prohibitive and convenient to follow in the long term. Provide enough energy for the day’s work as well as exercise. Allow some refined carbs occasionally (in a planned way) to avoid carb craving (and bingeing). Hence, we can consider viewing foods to be had daily, and those to be had occasionally. Foods for daily consumption are salads, vegetables, nuts, seeds, legumes (including daals, sambar, beans) and for those who eat them – a serving of meat, fish, cheese, curd and eggs. Of these, nuts and the non-veg items are to be taken in limited quantities, as are starchy vegetables (potatoes, peas), wheat and wheat products (chapatti, bread, cereals) and white rice. Rice products like dosa, idli and uttapam have glycemic indices on the higher side that are lowered by eating them with sambar; brown rice is healthier too. Fats and oils have been discussed earlier in a separate article; extra virgin olive oil may be the best but is not suitable for high temperature Indian cooking (only good for salads). So, acceptable alternatives are the Indian oils for limited use including rice bran, mustard, coconut oil and some proprietary blends. Ghee, butter and coconut oil are especially good for frying (occasionally), but the remaining amount should ideally be discarded after a single use (repeated frying in the same oil generates trans fatty acids, which are definitely implicated in causing heart disease and strokes). Snacks should be minimised; if needed, the best snacks are nuts, seeds, sprouts, fruits, boiled eggs and salads. The best drink is water, though tea and coffee can be enjoyed (best if unsweetened and with little milk or cream), apart from vegetable juices. Hence, sodas, fruit juices, artificial sweeteners and alcohol are best avoided or minimised. The best part comes last: the cheat day / meal. If one can stick to the diet for 6 days, the reward comes on the 7th day; anything one fancies can be enjoyed that day. This provides better satisfaction, no absolute lack of tasty carbs and meals, and the fortitude to stay clean the rest of the week. It may even help as it gives the metabolism a kick-start with a large calorie load, and the heaviest exercise may be done on the cheat day for best results. The cheat day is the insurance policy against giving up in frustration. If one has had to indulge some time during the week (a birthday, a marriage or a party), one can have just one cheat meal over the weekend, instead of a full day. Thus, one can enjoy two cheat meals over a week and get away with it! In summary, one can lose weight on almost any diet in the short run, so what’s more important is to find a program one can stick to. For this purpose, the best diets are the Mediterranean, Pegan and Warrior diets. The diet proposed here is a synthesis of these popular diets tailored to the Indian taste, making it relatively easier to follow while being less limited in its choices of foods. Intermittent fasting and the cheat day are hacks to make one stick to the plan: please remember that weight loss is not a one-time job, it is a holistic, lifestyle change for the rest of one’s life. All the very best to you all!! This is a recurring column published every Sunday under the title: What is Nutrition. Next week I will do a deep-dive on “Popular FAQs on Health, Diet, Weight Loss and Exercise” Stay tuned. (We are now on your favourite messaging app – WhatsApp. We highly recommend you SUBSCRIBE to start receiving your Fresh, Homegrown and Handpicked News Feed.)
On Friday, 14th September, PM Modi met with Finance Minister Arun Jaitley, RBI Governor Urjit Patel and several top policy-makers to take heed of the multifarious headwinds facing the Indian economy, the effects of which is being evidenced by the sliding INR. What came out of it was an incremental 'five-point economic action plan'. While these incremental measures came in somewhat short of market expectations, additional measures with heightened granularity are expected to be announced in the coming days. Here is a brief overview of the five-point plan. Mandatory hedging conditions for infrastructure loans to be eased allowing companies greater flexibility in raising dollar-denominated loans. Under the current set-up, Indian borrowers tapping foreign currency loans advanced by non-resident lenders are required to cover the principal + coupon (interest payments) through financial hedges. These hedges results in an uptick in the borrowing costs for even well-rated companies notwithstanding natural hedges (via dollar-denominated exports) in place for several of them anyway. As per the announcement, these hedging requirements are expected to ease, allowing companies to raise dollar-denominated loans with greater flexibility. Allow manufacturing companies to avail foreign-currency denominated loans up to $50 million with a maturity of one year (down from three years) generally leading to lowering interest expenses and heightened flexibility in overseas funding. Like most bonds (loans), shorter duration should lower hedging costs and somewhat lower interest rates. Consequently, this should bode well for manufacturing companies in de-risking subsequent interest bearing capital raises. This should also boost the ability to refinance loans to gain interest rate benefits while also improving the overall flexibility in overseas funding. Removal of 20% exposure limit of FPI's corporate bond portfolio to a single corporate group, and 50% of any issue of corporate bonds will be reviewed aimed to drive more FPI traction. As it stands, investments by an FPI is not allowed to exceed 50% of a corporate bond issue. Also, FPIs are not expected to have more than 20% exposure of its corporate bond portfolio to a single company. The announced measures aim at loosening these impeding restrictions and such are expected to drive more FPI traction. Exemption from withholding tax for masala bond issuance for the current fiscal year designed to attract overseas investors. This is the 5% tax that Indian companies pay on the interest payable to foreign companies but is typically financially engineered into the coupon rate and passed on to investors. In that context, removing withholding tax of 5% on interest rates should bode well for overseas investors. The issuer should also be able to offer better returns to investors in effect making such bond offerings more competitive in the global marketplace. Removal of restriction on Indian banks market making in Masala bonds including underwriting of Masala bonds to widen the instruments scope and breadth. Indian companies can now go to foreign branches of Indian banks to manage Masala bond issuance (Rupee-denominated bonds issued overseas). Earlier, they had to rely on foreign stock exchanges and foreign underwriters. This was a meaningful obstacle for many companies who did not have that level of resources or reach. All these measures are directly aimed at increasing dollar inflow in an attempt to support the Indian Rupee. There were generic comments made on trimming down "non-essential" imports without actually identifying what qualifies as essential and what qualifies as non-essential. However, one can expect more detailed measures in coming days as the INR appears to maintain its slide. (We are now on your favourite messaging app – WhatsApp. We highly recommend you SUBSCRIBE to start receiving your Fresh, Homegrown and Handpicked News Feed.)
The Indian Economy came under intense scrutiny last week thanks to a continuously sliding Rupee and rising fuel prices, culminating into a haphazardly organized 'Economic Review' by the PM, FM, and RBI Governor over the weekend. Much political leverage was granted to the opposition. Depending on your political leanings, this may come across as a moment of reckoning for the government's flaky approach to the Economy or simply a contagion of external factors where one doesn't have much control. The truth as they say, is somewhere in between. A summary of drivers which brought us here: Indian Rupee has fallen by -13% vs. the Dollar since the start of the year. However, most Emerging market currencies have weakened in the same period. Foreign investors are punishing emerging markets across the board, with Turkish Lira down -63%, Brazilian Real and South African Rand down -26% and -21% respectively. Russian Ruble (-18%), Chilean Peso (-12%), South Korean Won (-5%), and the Chinese Renminbi (-6%) have followed a similar fate. There is a sense that all EMs are at some risk or the other. India due to rising crude oil price and capital flight. China due to the trade war with US. Turkey due to a loose monetary policy and weakening credit. Russia because its Russia. Counter measures have commenced in Turkey where interest rates have been tightened to a record 24%! Nevertheless, the "external" impact of increasing crude oil prices and rising US interest rates on the Indian Rupee are very real. The Rupee had depreciated -8% before the Turkish Lira crisis began year-to-date. This is because crude oil prices rose by 16%, from $62.3 to $72.5 per bbl in the same period. India imports 80% of its oil from overseas. And most international crude oil trading is conducted in USD, being the world's sole reserve currency of choice. Thereby, our oil marketing companies have been steadily buying USD in exchange for INR to fulfill our oil needs - negatively affecting the Rupee. The second effect has been that of rising interest rates in the US, hiked twice this year, with the third hike expected end of this month. It means that foreign investors, who were earlier flocking towards emerging markets such as India are moving their money back to the US, which for the first time since 2008 is offering healthy yields. Capital flight means sale of Rupee and purchase of Dollars, and the Rupee suffers further. However, the problem with high petrol and diesel prices is more "internal" in nature i.e. over 45% of retail selling price of petrol comes from central excise duties and VAT. The Indian Basket of crude oil was at $124 per bbl in March 2012 (when it hit its peak this decade) with petrol in Delhi selling that time at INR65 per litre. Crude oil price now is -41% lower at $72.5 per bbl, but petrol price is up 24% at INR81. Two things are happening. Indian Rupee has weakened by -38% during the same period, so effective fall in crude oil price (in Rupee terms) has been -21%, and not -41%. Secondly, central excise duty and VAT have steadily increased since now comprising 45%+ of the retail selling price of petrol. Reduce the taxes, you reduce the retail price. Another option may be to bring petrol and diesel pricing under the GST regime, thereby replacing 45% taxes by a maximum slab of 28%. However, considering petrol and diesel are significant contributors to the government coffers, it is hesitant to act in this direction, especially in a fiscally tight environment. PM's Economic Review has been a half hearted attempt, with no mention of reducing fuel taxes or opening of swap windows for Oil Marketing Companies. The Economic Review over the weekend has focused mostly on boosting Dollar reserves and pushing the bond market. There is no immediate respite for the consumer which could have taken the shape of fuel tax cuts or a forex swap facility for oil marketing companies (like the one temporarily setup in 2013). Through these swap facilities, oil marketing companies would be allowed to source Dollars directly from RBI reserves to buy crude oil, instead of going in the open market, thereby protecting the Rupee against future oil-related volatility. The market keenly awaits that move. Petrol and Diesel price inflation means the RBI may take a more hawkish stance sooner rather than later. The Monetary Policy Committee of the Reserve Bank of India is scheduled to meet early October. Rising inflation driven by fuel costs means the Central Bank may push for another rate hike, thereby tightening the macro environment. Retail and commercial loans will become more expensive. Equity markets would continue to stay volatile. Banks stock owners should rejoice with a higher expected interest income. (We are now on your favourite messaging app – WhatsApp. We highly recommend you SUBSCRIBE to start receiving your Fresh, Homegrown and Handpicked News Feed.)
We like to talk Business and Finance. Figured we should do it for a living. This week's podcast is a "productive" discussion around: Rising Petrol Prices Petrol prices are soaring. Interestingly, between petrol prices at the peak of crude oil in March, 2011, and the petrol price right now, the increase has been around 40%, whereas during the same period, crude oil prices, which should theoretically form the bases of petrol prices have gone up by only 12.5% (adjusted for currency). There is a clear discrepancy. Why might this be? India Post Payments Bank India Post Payments Bank (IPPB), launched by the Prime Minister early this month can be a game changer for last mile financial inclusion in our country. IPPB is supposed to provide banking services across 155,000 post office branches nation-wide by year end, 3 lakh on-ground postmen have to be adequately trained in QR tech to efficiently deliver banking services. How will the grand scheme pan out? Rise of Video on Social Media Twitter recently collaborated with Red Chilli Entertainment, NDTV, Network 18 - clearly an attempt to venture into content play. Lines between television, media and internet continue to blur, as we see the proliferation of newer services and platforms. This, coupled with falling data prices and increasing smartphone penetration is opening newer avenues for the end user to consume video content. Definitely a space to watch out for. (We are now on your favourite messaging app – WhatsApp. We highly recommend you SUBSCRIBE to start receiving your Fresh, Homegrown and Handpicked News Feed.)
India Post Payments Bank (IPPB), launched by the Prime Minister early this month can be a game changer for last mile financial inclusion in our country. Structured as a 'Payments Bank', a new type of financial institution envisaged by the RBI - allowed to collect small deposits but not advance loans. Instead, Payments Banks can issue services like ATM / Debit cards, payments and transfers, sell third-party manufactured products like mutual funds, pensions, insurance etc. In case of IPPB, this shall be done leveraging upon India Post's vast postal branch network. IPPB is supposed to provide banking services across 155,000 post office branches nation-wide by year end As per Manoj Sinha, Minister of Telecommunications, IPPB has been launched in 650 branches which has resulted in 3,250 access points. The aim is to spread to all 155,000 post office branches nationwide by the end of this year. However, the terms "branch" and "access points" are being used interchangeably in the narrative, thereby making an understanding of its current operational footprint a wee bit hazy. IPPB can be a game changer for last mile financial inclusion owing to its ability to leverage India Post's widespread postal network IPPB's operational leverage will come from 300,000 on-ground postmen who would, again on paper, provide financial services to remote unbanked parts of the country using mobile phones, biometric devices, and QR codes. However, government's expansion plans may be a bit too aggressive. Going from 650 branches in Sept to 155,000 branches by Dec 31 appears far fetched from an execution perspective Considering the original 650 branches were supposed to be rolled-out by April 2018 and ended up going live with a four month delay is a case in point. 3 lakh on-ground postmen have to be adequately trained in QR tech to efficiently deliver banking services. Internet and technology infrastructure remain key The postmen need to understand how to process QR code transactions and operate the biometric devices. Customers would have to deal with poor internet connectivity and low device penetration, which may negatively affect access to mobile banking services, as promised. Lastly, the profitability of the 'Payments Bank' model is yet to be tested Payments Bank is a new model where the concerned institution is not allowed to advance loans, thereby missing out on beefy interest income i.e. the staple of a traditional bank. Without loans, a Payments Bank, at the end of the day, become a volume play, needing to transact thousands of payments, transfers, third-party product sales to ensure they make a profit. The existence of a branch network is an operational boon to IPPB. However the Minister's claims that it will turn profitable in 2 years appears to be an overstatement. To receive a daily summary of the key business news and our succinct End Of Day Wrap Ups directly on your phone, subscribe to our WhatsApp feed here.
Jackson Hole Economic Symposium is a closely watched annual symposium, sponsored by Federal Reserve Bank of Kansas City and held in Jackson hole, Wyoming, US. This year’s symposium took place on Aug 23- 25th 2018. The symposium as such is one of the most well regarded finance and economics event Keenly followed by industry participants across the world. The symposium, focuses on economic issues facing the US and the world It brings together economists, central bankers, academics and other stakeholders from the financial market to foster the open discussion that the symposium is known for. Attendees are selected based on each year’s topic with consideration for diversity in region, background and industry. Theme for this year: "Changing Market Structures and Implications for Monetary Policy" The conference largely discussed the market power of “superstar firms” like Amazon, Google etc in the U.S. and other developed economies. At a high level, arguments were made to adjust for the impact of ‘superstar firms’ such as Amazon on inflation due to the role played by them in lowering retail prices. Fed Chairman Jerome Powell defended lifting interest rates He laid out the case for continuing to raise rates whilst keeping stable inflation (target of 2%) and falling unemployment. This comes amidst President Donald Trump’s fairly well-documented disapproval of raising rates due to its perceived drag on US economic growth. Former RBI governor Raghuram Rajan said, he does not see a systemic issue yet by the recent turmoil in Turkey and Argentina However, he cautioned that trade wars coupled with an uptick in leverage and high asset prices could result in a toxic mix that could be a drag on global growth. This was the symposium where Raghuram Rajan presented a paper which is widely credited for predicting the 2009 financial crisis. (We are now on your favourite messaging app – WhatsApp. We highly recommend you SUBSCRIBE to start receiving your Fresh, Homegrown and Handpicked News Feed.)
TRAI on July 16th issued its Recommendations on "Privacy, Security and Ownership of Data in the Telecom Sector". What? In the aftermath of the Facebook-Cambridge Analytica data scandal and the release of GDPR rules in the European Union; privacy, consent, and data security have achieved a mainstream consumer interest narrative. India's vulnerability to Cyber Crime, continuous judicial activism post Aadhaar, and its sheer demographic scale has ensured this debate is as relevant on domestic shores. TRAI's recommendations act as a suitable reference point for things to come. 5 Key Takeaways: 1. The user owns his/her data; Entities (i.e. mobile devices, tablets, PCs, telecom service providers etc.) are mere "custodians" of data 2. Entities within the digital eco-system should be restrained from using Meta-data to identify users 3. The Right to Choice, Notice, Consent, Data Portability, and Right to be forgotten should be conferred upon the telecommunication consumers (largely in-line with EU GDPR) 4. Use of "pre-ticked boxes" to gain users consent should be prohibited. User Agreements should be short, easy to understand, unbiased, and multi-lingual 5. A study should be undertaken to formulate the standards for anonymisation/de-identification of personal data generated/collected in the digital eco-system What it Means for You? TRAI wants to give consumers more control of his/her data and in turn giving consumers greater control on privacy. The recommendations (if adopted) should make tracking and monetizing of consumer data a much trickier exercise by entities within the digital eco-system. For a country where the right to privacy is subject to constitutional confusion, it is welcome to increase data security norms in order to fill the void. As usual, timely and efficient execution and enforcement is key. For a deeper-dive into TRAI's recommendations click here.