How Does the Government affect The Economy?

How Does the Government Affect The Economy?

Understanding how does the Government affect the economy: A Government is the largest stakeholder in the economy. Consequently, its actions have a profound impact on many macroeconomic variables.

Today, we’ll cover how does the government affect the economy. Here, we’ll explain how government policies work to influence economic growth, unemployment, inflation, interest rates and exchange rates.

Government Affect on Influencing Economic Growth

Government actions are one of the most significant factors determining the level of economic growth both in the long term and the short term. In the short term, the government is concerned with economic stability and uses fiscal policies to manage business cycle fluctuations. We can understand how the government’s fiscal policy affects economic growth through the national income accounting basic equation, which measures the Gross Domestic Product (GDP) or national income as a sum of four components.

GDP = C + I + G + NX

The left side of the equation is the GDP, which is the value of all final goods produced in a country. On the right side of the equation are the sources of aggregate demand – private consumption expenditure (C), private investment (I), Government expenditure (G), and net exports (NX) which is calculated by deducting total imports from total exports. The equation shows that governments directly control total aggregate demand and the GDP through their spending (G).

Through tax rates governments also indirectly influence consumption expenditure. Government expenditure (G), works with a multiplier effect. It means that a small increase in expenditure has a large impact on the national output. Because of this phenomenon, increasing government spending is considered one of the most effective ways to recover economic growth after a slowdown. A cut in taxes also boosts consumer spending, which is the largest contributor to aggregate demand in many countries.

Government spending on infrastructure, education, research etc. adds to the productive capacity of a nation. This, along with various welfare programs to tackle poverty and inequality, help improve living standards and achieve sustainable economic growth and development in the long term.

Reducing Unemployment

unemployement how does govenment reduces

Unemployment is both – a cause and consequence of poor economic growth. High unemployment means people have less income to spend, thus reducing aggregate demand and the GDP. Conversely, poor economic growth negatively impacts the firms’ revenue, forcing them to lay off workers, which increases unemployment. Persistently high unemployment increases poverty and inequality, and it has often created social unrest in many countries. Through its economic policies, reducing unemployment is one of the main objectives that governments intend to achieve.

Governments use fiscal policy to tackle unemployment in two major ways:

  1. Increasing investment: Governments provide incentives for companies to invest in labour-intensive sectors. Incentives like tax breaks, subsidies, infrastructure support and easing regulations are the most common ones.
  2. Welfare programs: Governments provide direct employment to skilled and unskilled workers through their welfare schemes. An example is India’s National Rural Employment Guarantee Act (NREGA) which has proven effective in providing employment in rural areas.

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How does the Government Affect Inflation to grow the economy?

Inflation is a measure of the change in price levels in the economy. A low positive inflation rate is deemed as a prerequisite for economic stability and growth. Though inflation is a monetary measure and managing it is the central bank’s responsibility, the government’s policies also influence inflation. As shown in the national accounting equation, government expenditure (G) is a component of the aggregate demand.

Governments spend to provide public goods and services, social infrastructure, healthcare, education, welfare schemes, subsidies etc. The primary source to fund this expenditure is tax revenues. The difference between expenditure and revenue is called the fiscal deficit. Politicians often resort to spend more and hesitate in raising taxes as it is unpopular. More expenditure increases the fiscal deficit and also adds to demand pressure, causing prices to rise.

A persistently high fiscal deficit is one of the main factors that cause high inflation. This deficit is typically financed through borrowing or printing more currency. Governments may borrow from the public by issuing bonds from the financial market or from international institutions.

Borrowing adds to public debt, and there are interest costs for financing. An easier option for the government is just to print more currency. While technically, printing currency is a responsibility of the monetary authority, governments can monetize their debt which is akin to printing currency.

There is a lot of debate about how does the government affect the economy. Debt monetization is a process where the government borrows money directly from the central bank by selling bonds, and the central bank pays for it simply by printing more currency. More currency in circulation causes too much money, chasing too few goods. Prices rise in nominal terms and the value of the currency falls.

Reckless spending by governments without appropriate supply-side reforms to increase productive capacity can give rise to consistent high inflation. If not controlled, an inflation spiral can lead to hyperinflation, which has devastating effects on the economy. Hyperinflation is a situation of excessive and out of control rise in price levels. A recent example of hyperinflation caused due to excessive government spending is the Venezuelan crisis which began in 2016. In 2018, Venezuela had the highest inflation rate in the world – an annual rate of 80,000%.

To maintain economic stability, governments have to limit their fiscal deficits. Having a low fiscal deficit is a sign of good economic health. Because inflation impacts the economy and financial markets, investors pay close attention to the fiscal deficit numbers in the government’s budget. Any significant rise in deficits indicates inflation risk, to which prices of fixed income securities like bonds are most sensitive and react negatively.

The chart below shows the Indian government’s success in bringing down the fiscal deficit (as a % of GDP) from 2011 – 12 to 2018-19.

how does govenment affect the economy

The government can also influence the price levels in the economy more directly through wage and price controls.  Minimum wage policy and Pay commissions set up by governments to decide wages in the public sector are factors that impact wages in the overall economy. Similarly, the government’s minimum price floors like the Minimum selling price (MSP) for agricultural crops feed into the prices of many other goods and services.

Government Affect on Interest rates

Interest rates are the price for borrowing and lending money. Primarily it is the responsibility of the monetary authority, i.e. central bank to manage the interest rates in the economy. But as it turns out, government actions can also influence the market interest rates.

A high fiscal deficit causes interest rates to rise. This is how it works – When governments face a high fiscal deficit, they have to borrow more money to finance it. To borrow money from the public, new government bonds are issued in the market. More supply of government bonds increases the demand for money and the basic law of demand and supply tells us that the higher the demand, the higher the price. Thus more demand for money raises its price, which is nothing but the interest rate.

Higher interest rates caused by a high fiscal deficit also affects the economy in another way – by reducing private investment expenditure. Investment decision by companies is highly sensitive to the cost of borrowing, i.e. interest rates. High-interest rate increases the financing costs for the companies and makes investment projects unviable. This negative impact on investment expenditure due to high levels of government borrowing is called as the crowding-out effect.

How does the Government Affect the Exchange rate?

The exchange rate is the price of the domestic currency relative to the foreign currency. The government’s fiscal policies also impact the exchange rate. A high fiscal deficit can cause an appreciation of the domestic currency in the short run. We have already seen that a high fiscal deficit increases the domestic interest rates. High interest rate attracts foreign investors, who sense an opportunity to earn more returns on their investment. As a country receives more investment inflows, demand for the domestic currency rises, causing its price to rise vis-à-vis foreign currency (exchange rate).

An appreciation in domestic currency’s value makes imports cheaper and exports more costly, causing net exports (exports – imports) to fall. But a high fiscal deficit, in the long run, can have an exact opposite impact. A persistently higher fiscal deficit increases the government’s debt burden; it also increases the risk of high inflation. If investors perceive an impending economic crisis, they sell their investments and the resulting in an outflow of foreign exchange, depreciates the value of the domestic currency.

Closing thoughts

In this article, we discussed how does the government affect the economy. In summary, the government’s fiscal policies like spending and taxation have a direct impact on economic growth through aggregate demand. Reducing unemployment is one of the main objectives of the government.

A high level of government borrowing creates demand pressure which increases the price levels and rate of inflation. A high fiscal deficit increases interest rates and crowds out private investment; it also causes depreciation of the domestic currency.

Explained: How is PESTLE Analysis (With Example)? How to Perform it?

Understanding what is PESTLE Analysis? (Explanation & Example): Hello readers! We are back with another interesting article on PESTLE Analysis that will help to enlighten your knowledge horizon regarding the nitty-gritty of strategic management for running a prosperous business.

Are you someone who is planning to take the road of entrepreneurship and set up a new business by quitting your 9 to 5? Then, this article is most definitely for you! Well, to start off, there are a lot of factors that are needed to take into consideration for establishing a start-up business. Interestingly, it is not only the startups but also the Blue Chip Companies who need to constantly gauge strategies for sustaining their businesses and make a prominence.

Today, we are going to discuss a strategic management framework known as PESTLE (Political, Economic, Social, Technological, Legal, Environmental) Analysis which has emerged to be an important apparatus for scanning the internal and external factors impacting a business. Let us first learn the definition to understand the concept of PESTLE Analysis.

What is PESTLE Analysis?

A PESTLE Analysis is a hypothesis under the category of marketing principles ensuring business growth and profitability.

Francis J. Aguilar, a professor at Harvard Business School is considered to be the founder of the PESTLE Analysis in 1964. However, it didn’t commence as PESTLE but started as ETPS and covered four broad factors namely  Economic, Technical, Political and Social aspects.

Initially, it was known as PEST Analysis. It is anatomy and a strategic management tool that helps to scrutinize the macro-environmental factors that may have a resonating influence on an organization’s accomplishments. The acronym PESTLE is the shortened form of Political, Economic, Social, Technological, Legal factors and Environmental factors. The concept largely helps companies to acquire a transparent insight into the intramural and extramural factors affecting their organization. It also provides a general overview of the environment from multifarious points before launching a new project, new product, new service, etc.

PESTLE Analysis is contemplated as the backbone of strategic management that interprets the approach of a company and defines an organization’s strategies and intertwined futuristic goals.  The theory can be applied to different industries in divergent scenarios because of its analytical flexibility. In order to conduct the PESTLE Analysis, it is utterly important to understand each letter of the “PESTLE” in depth.

PESTLE ANALYSIS Flow

— Political Factors

Political factors usually indicate the authoritative powers that a government possesses in the economy or, in case of a certain industry. Such factors consist of policies of the government, extent of political stability, foreign trade policy, fiscal policy, trade tariffs, labor law, health regulations, education system, environmental law, infrastructure, corruption, and etcetera. All these aspects need to be taken into account when evaluating the lucrativeness of a potential market.

Example: A government may levy a new tax policy or fiscal policy or trade tariffs in a new financial year which can affect the revenue generation of organizations to a large extent. Recently, the Government Of India has reduced corporate tax rates to 22% from 30%. Consequently, this move will help the top-notch companies to revive their profitability and would be a  good catalyst for luring investment from foreign investors. The announcement also arrives at a perfect time because major American organizations are involved in a trade war with China and are finding alternative global manufacturing pedestals.

— Economic Factors

Economic factors are crucial determinants and plays an important role in the performance of an economy. Such factors generally end up becoming a key decision-maker in the success or, failure of a company. A surge in the rate of inflation of any economy can affect the pricing pattern of a companies’ products and services. In addition, it also impacts the purchasing power parity of the consumers and brings about a change in the forces of demand and supply in the economy. The economic factors include inflation rates, exchange rates, interest rates, economic growth, gross domestic product, unemployment rates, economic growth and disposable income of consumers.

EXAMPLE: In  India, in the past few weeks, vegetable prices have skyrocketed and as a result, there is a rise in the rate of inflation. Consequently, due to the hike in prices, the purchasing power of people has gone down which ultimately indicates that there will be a fall in consumer demand.

— Social Factors

Social factors pin-point the social environment in relation to the industries and constitute the demographic features, customs, norms, and values of the population within the operating periphery of the organization. Social factors consider the population trends such as age distribution, cultural barriers, income distribution, the growth rate of population, lifestyle attitudes, career inclinations, and health consciousness.

All the above-mentioned aspects are very significant for marketing strategists when earmarking the customer bases. Apart from that, the factors also reveal information about the local workforce and their compliance to work under certain conditions.

EXAMPLE: In today’s era, the demand for junk foods like Pizza and Burgers has gone up extensively, especially amongst the younger generation. Thus, companies like Dominos, Pizza Hut, Burger King and KFC are churning out huge profits because of the consumers’ behavior. On the contrary, the same doesn’t hold true for the people in rural areas. This is how social factors affect companies’ revenue structure.

— Technological Factors

Technological Factors have relevance to modernization in technology which influences the performance of an industry. Such factors include a level of innovation, research, and development (R&D) activity, amount of technological awareness, technology incentives and automation. Technological Factors highly affect the decisions regarding entry/exit in an industry, launching of a new product and outsourcing production-related activities. Possessing a sound knowledge regarding technology helps companies from spending a lump sum amount of money on obtaining a technology that would become obsolete in the near future due to the innovation of newer technologies globally.

EXAMPLE: The business space is filled with cautionary sagas of large scale companies that became failures due to their inability to keep up with the dynamic technological innovation. One such prominent example is Kodak, a technology company that used to produce camera-centric products and hegemonized the photographic film market during most of the 20th century. The breakthrough in digital photography contributed to the catastrophic misfortune of their film-based business model.

— Legal Factors

Legal factors include laws such as health and safety laws, discrimination laws, safety standards, employment laws, consumer protection laws, copyright and patent laws and antitrust laws. Every company is bound to have awareness regarding the laws for the purpose of conducting ethical business. In addition, a business owner also needs to be aware of any possible alteration in legislation which may have an impact on the business in the long term. Interestingly, the set of rules and regulations varies from country to country. Analysis of legal factors figures out strategies based on the backdrop of the legislations. However, it is always advised to have an appointed lawyer or an attorney to guide through the complexities.

EXAMPLE: Nestle had to take away the packets of Maggi from the stores’ shelves after the  Food Safety and Standards Authority of India (FSSAAI) summoned Nestle because of their negligence to adhere with the laws of food safety. Regulators found lead content beyond the permissible limit in its instant noodle product.

— Environmental Factors

Environmental factors have appeared to become a pivotal character recently. They have become utterly valuable due to carbon footprint targets, scarcity of raw materials and pollution targets fixed by governments. Environmental factors include ecological facets like climate change, weather conditions, environmental offsets which highly govern tourism, agriculture, and farming industries.

Especially, large-scale campaigns regarding the burning issue of climate change are leading to the change in operation and products of the companies. Therefore, practices of Corporate Social Responsibility (CSR) and Sustainability forms an integral part of the companies and is taking new shapes with each passing day.

EXAMPLE: Due to the imposition of government rules as a measure to curb global warming, regulations on fossil fuel industries have increased considerably and as a result, this move has started threatening the thriving coal, oil, and gas industries.

PESTLE Analysis Example — SONY

sony corporation

SONY is a Japanese MNC  and has abruptly metamorphosed into one of the dominant entertainment organizations in the world. Its versatile business products consist of electronics, entertainment gaming,  and financial services. The company is the owner of the largest music entertainment business around the globe and also a chief player in the film and television entertainment industry.

— Political Factors

SONY is a world-class brand and has a prominent presence in several countries around the world.  The political scenario in different countries largely impacts the SONY’s success. As we know, political Stability ignites growth and political instability, on the other hand, paralyzes the rules and regulations of an economy. In Sony’s context, its supply chain is located in China. Thus, any kind of political disturbance in China will have a heavy influence on Sony’s generation of profits.

— Economic Factors

SONY products fall under the category of luxury goods. Such goods are not items of necessity but are usually purchased when people want to splurge on themselves. In a nutshell, if you living paycheck to paycheck, a SONY product would not be a priority in your list of necessities. In another instance,  economic instability and the high rate of unemployment in a country will never attract buyers for the high-end SONY products. Consequently, the profits will touch a rock bottom. Therefore, it is crystal clear that a big giant like SONY extensively depends on stable and emerging economies to merchandise their entertainment products.

— Social Factors

Traditions, culture, age distribution, taste, and preferences vary from nation to nation. SONY offers entertainment products beginning with movies to music which basically acts as an escape to reality. It is to be kept in mind that not every nation has the same pattern of entertainment. Therefore, it is extremely important for SONY to keep up to date regarding the buying trends of the consumers and consequently tailor the products and services fitting the requirements of the customers.

— Technological Factors

SONY is a true blue technology company because every other product is correlated with the usage of technology in some way. The company’s  Video Game  Consoles are nothing but computer devices that produces video signal or,  optical image to exhibit a video game for multiple players. On the other hand, laptops help users to stay connected to social media and other websites on the world wide web.

In today’s era, the availability of the internet has removed all the possible obstacles of communication and SONY has bagged this opportunity to market their products online. It has become convenient for the company to announce any new launch of products via the medium of the internet.

— Legal Factors

Since SONY is an international company and sells its products across many countries, it also has to abide by the diversified legal regulations of different countries. Any failure to adhere to the legalization like labor laws to tax policies, the company might end up in serious legal trouble or lawsuits which can further affect their prosperous business.

— Environmental Factors

Sony believes that their corporate pursuits will be possible when there is a practice of sustainable development and thus they are so full of conviction regarding climate change, conservation of biodiversity, renewability of resources and other valuable measures to save the environment. SONY has taken up initiatives regarding environmental activities since the 1990s.  In April’10, a new environmental plan was introduced by SONY to set up a sustainable community by accomplishing a zero carbon footprint by the year 2050.

We will now elaborate on the major pros and cons of PESTLE Analysis.

Advantages And Disadvantages of PESTLE Analysis

— Advantages of PESTLE Analysis

  1. PESTLE Analysis has a basic framework and follows a simple process for conducting an assessment.
  2. It furnishes a mechanism that allows an organization to pinpoint and cash in on golden opportunities and utilize them to reinforce a firm’s business model.
  3. It helps to diminish the impact and consequences of possible threats to an organization.
  4. It sanctions a company to examine the process of entering untapped markets both nationally and internationally.
  5. It helps to build a custom of strategic thinking for strengthening the company’s position.
  6. It is absolutely cost-effective and the cost to do any level of the assessment isn’t exposed to oscillations.

— Disadvantages of PESTLE Analysis

  1. PESTLE analysis cannot showcase the full picture because it only focuses on six factors that are external in nature. In strategic planning, one needs to go beyond these six factors which can provide internal insights as well.
  2. The Political, Economic, Social, Technological, Legal and Environmental factors are very dynamic in nature. Any shift in any of these factors can change the result of PESTLE Analysis drastically.
  3. PESTLE Analysis is time-consuming in general and requires loads of data. Each of the factors needs to be thoroughly examined to come to a conclusion and thus, takes up a lot of time.

Summary

PESTLE Analysis provides a basic framework and follows a simple process for conducting an assessment. It is a hypothesis under the category of marketing principles ensuring business growth and profitability.

In order to conduct the PESTLE Analysis, it is utterly important to understand each letter of the “PESTLE” in-depth i.e. Political Factors, Economic Factors, Social Factors, Technological Factors, Legal Factors & Environmental Factors.

Economic Calendar Must Know Financial Events that Move the Market cover

Economic Calendar: Must Know Financial Events that Move the Market!

List of Economic/ Financial Events that Move the Market: There is a multitude of Economic factors that determine the performance of financial markets. Throughout the economic calendar, new information becomes available at periodic intervals that provides insights to better understand the present and predict the future.

Today, we’ll look into the major financial events that move the market. This article gives a brief description of the various economic events that Indian investors keep a track to assess the overall health of the economy and its impact on their investments. 

Must-Know Financial Events that Move the Market!

1. Economic Data 

Some of the most important economic data releases that impact the Indian financial markets are:

A) Inflation

india-inflation-cpi

This is a measure of the change in prices of goods and services over a period of time. Various indices are used to measure inflation. An index tracks the changes in the prices of a basket of goods and services. The Consumer Price Index (CPI) is the primary index that measures retail prices of goods and services like food, transportation etc.

Another index is the Wholesale Price Index (WPI), which measures the prices at a wholesale level. The data for both – CPI and WPI is released by The Central Statistics Office. The percentage increase in the value of the index indicates the percentage change in the aggregate price level, i.e. inflation. The impact of inflation on the stock market can be both – positive or negative.

Most often, higher inflation causes the purchasing power of consumers and fall and reduces demand. Higher inflation could also lead to a rise in interest rates that increases borrowing costs and reduced valuations (due to higher discounting rates). These factors negatively impact the markets overall.

A positive aspect of rising inflation is that some inflation is essential for economic growth. For example, countries in Europe and Japan have been trying for years to revive inflation that would help spur economic growth. Inflation also impacts different sectors and companies differently. A company’s ability to pass on higher input costs to its customers will determine the impact of inflation on its profit margin.

B) Industrial activity

Growth in the industrial/manufacturing sector is considered as a leading indicator of the overall health of the economy. Increased industrial production signals a rise in demand, and since the industrial sector is closely linked to other sectors of the economy, higher industrial activity positively impacts other sectors.

An index that tracks the growth in manufacturing activity in the economy is the Index of Industrial Production (IIP). The IIP is calculated monthly and released by the Central Statistics Office. Low or negative growth in the IIP is bad for corporate sales and profits; thus, stock prices fall in reaction to it.

Another forward-looking measure of industrial activity is the Purchasing Managers Index (PMI). PMI ranges from 0 to 100. A value below 50 represents a contraction, whereas a value above 50 represents an expansion compared to the previous month. A separate PMI index is also calculated for the services sector. 

C) Economic Growth

The most popular measure for the size of the economy is the Gross Domestic Product (GDP). It is the total value of all goods and services produced within a country in a particular time period. The growth rate of GDP indicates the health of the economy. The GDP data for India is calculated quarterly and is released by the Central Statistics Office.

High growth in GDP indicates growth in income and strong aggregate demand, and corporates are likely to perform better in such an environment. Thus high GDP growth coincides with an increase in stock prices and valuations.

Another measure of economic performance is the Unemployment rate, which is measures the number of people unemployed as a percentage of the total labour force. Higher unemployment indicates a poor state of the economy – companies less willing to hire, reduced aggregate demand and further layoffs.

It has been observed that the unemployment rate is negatively correlated to the prices in the stock market. In India, Center for Monitoring Indian Economy (CMIE), releases monthly estimates for the unemployment rate. 

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2. Monetary Policy

Monetary policy refers to the process through which the central bank (RBI) regulates and controls interest rates, money supply and credit in the economy in order to achieve its objective of price stability and economic growth.

Using various instruments at its disposal, the central bank regulates a plethora of interest rates and liquidity in the financial system. Markets prefer loose monetary policy, i.e. one where interest rates are reduced, and liquidity is increased. Lower interest rates reduce the cost of capital, increase borrowing and aggregate demand.

A fall in discount rates improves valuation in the equity markets; thus, a low interest rate environment is always bullish for stock prices. Furthermore, fixed income and money markets are very sensitive to interest rate changes; a fall in rates causes prices to rise. But there is always a risk of financial instability and high inflation that needs to be checked. The task of the Central bank is to balance and maintain interest rates that are neither too high nor too low.

Market participants pay close attention to the monetary policy decision taken by RBI’s monetary policy committee (MPC) that meets every two months. The minutes of the meeting, the RBI Governor’s speech, the stance of the policy etc. is scrutinized and have a material impact on market prices.

But the most important element of the monetary policy is the Repurchase Rate (Repo rate). It is the rate at which banks can borrow money from the RBI. Through the Repo rate, RBI tends to influence all other interest rates in the economy. A high repo rate would slow down economic growth; thus, stock markets react negatively to it. 

3. Budget

nirmala sitharam budget

The Union budget is an annual financial statement for the government’s estimated revenues and expenditures; it is a blueprint of the government’s fiscal policies, which includes the changes in taxation and economic reforms to be undertaken. The Budget has a wide-ranging impact on the economy, on companies across industries and individuals.

The Finance minister presents the Union budget to the nation every year in the month of February. It has been noted that the markets experience heightened volatility in stock prices during a few days before and after the Budget. Huge swings in prices become commonplace as market participants try to anticipate the Budget’s impact on company profitability and economy in general.

The Budget influences markets through the following channels:

A) Fiscal deficit

The fiscal deficit is the difference between total expenditure and revenue of the government. A high fiscal deficit means that the government would borrow more money from the financial markets. This increases interest rates and cost of borrowing for the corporates.

B) Tax rates

The personal disposable income of individuals is affected by personal income tax and various indirect taxes. An increase in these tax rates increases prices for consumers and reduces aggregate demand. Corporate tax rates directly affect the profitability of companies. 

Another set of taxes levied on investments is the STCG (Short term capital gains tax) and LTCG (Long term capital gains tax). A reduction of these tax rates enhances return on investments and incentivizes more people to invest in the markets. 

C) Sectoral allocation

Through the Budget, the government provides a layout of its planned expenditure in the different sectors of the economy. If the policies are in favour of a particular sector, companies in that sector stand to gain and will experience growth. Consequently, their stock prices react positively. 

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4. Elections

Political activities also influence the performance of the stock markets. The result of elections determine which governments come to power and what kind of policies will it pursue. Political uncertainty can positively or negatively affect the stock markets.

Indian general elections are held every five years, and markets react positively to the prospect of a business-friendly political party coming to power. Research shows that volatility in stock prices generally increases during the election period in India.

State elections are conducted throughout the year and serve as an indicator for the next general elections’ results. Market participants pay attention to state elections as it determines the extent to which business-friendly economic reforms can be implemented.

Indian stocks are also influenced by political activities internationally. Policy changes bought by a new government in other countries can impact the profitability of those domestic companies who do business in these countries. A recent example would be the rise in India I.T. as a result of a less protectionist government coming into power in the United States.   

Closing thoughts 

The performance of Indian financial markets depends on many economic events. In this article, we covered the major Economical/ Financial events that move the Market. In general, markets react to economic data like inflation rates, industrial production, GDP, unemployment rate etc. These indicators help in assessing the overall economic health and impact on corporate profitability.

Monetary policy sets the interest rates and liquidity in the financial system. The annual Budget in which the government announces its fiscal policies sets the tax rates and allocates resources to the different sectors of the economy.

Political events like elections – both domestically and internationally have an effect on financial markets as the fate of businesses to some extent, is determined by the political environments they operate in.  

6 Regulatory Bodies in Indian Financial System that Keeps the Market Safe! cover

6 Regulatory Bodies in Indian Financial System that Keeps the Market Safe!

List of Regulatory Bodies in Indian Financial System: The regulators in the Indian Financial Market ensure that the market participants behave in a responsible manner so that the financial system continues to work as an important source of finance and credit for corporate, government, and the public at large. They take action against any misconduct and ensure that the interests of investors and consumers are protected.

The objective of all regulators is to maintain fairness and competition in the market and provide the necessary regulations and infrastructure. In this article, we’ll discuss the various Regulatory Bodies in Indian Financial System cover.

Regulatory Bodies in Indian Financial System

Briefs about various regulators who regulate and contribute towards the development of the financial market are as given below:

1. Securities and Exchange Board of India (SEBI)

The Securities and Exchange Board of India (SEBI) is a statutory body established under the SEBI act of 1992, as a response to prevent malpractices in the capital markets that were negatively impacting people’s confidence in the market. Its primary objective is to protect the interest of the investors, preventing malpractices, and ensuring the proper and fair functioning of the markets. SEBI has many functions, they can be categorized as:

  1. Protective functions: To protect the interests of the investors and other market participants. It includes – preventing insider trading, spreading investor education and awareness, checking for price rigging, etc.
  2. Regulatory functions: These are performed to ensure the proper functioning of various activities in the markets. It includes – formulating and implementing code of conduct and guidelines for all types of market participants, conducting an audit of the exchanges, registration of intermediaries like brokers, investment bankers, levying fees, and fines against misconduct.
  3. Development functions: These are performed to promote the growth and development of the capital markets. It includes – Imparting training to various intermediaries, conducting research, promoting self-regulation of organizations, facilitating innovation, etc.

To perform its functions and achieve its objectives, SEBI has the following powers:

  1. To change laws relating to the functioning of the stock exchange
  2. To access record and financial statements of the exchanges
  3. To conduct hearing and give judgments on cases of malpractices in the markets.
  4. To approve the listing and force delisting of companies from any exchanges.
  5. To take disciplinary actions like fines and penalties against participants who involve in malpractice.
  6. To regulate various intermediaries and middlemen like brokers.

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2. Reserve Bank of India (RBI)

rbi logo

The Reserve Bank of India (RBI) is India’s central bank and was established under the Reserve Bank of India act in 1935. The primary purpose of RBI is to conduct the monetary policy and regulate and supervise the financial sector, most importantly the commercial banks and the non-banking financial companies. It is responsible to maintain price stability and the flow of credit to different sectors of the economy.

Some of the main functions of  RBI are:

  1. It issues the license for opening banks and authorizes bank branches.
  2. It formulates, implements, and reviews the prudential norms like the Basel framework.
  3. It maintains and regulates the reserves of the banking sector by stipulating reserve requirement ratios.
  4. It inspects the financial accounts of the banks and keeps a track of the overall stress in the banking sector.
  5. It oversees the liquidation, amalgamation or reconstruction on financial companies.
  6. It regulates the payment and settlements systems and infrastructure.
  7. It prints, issues and circulates the currency throughout the country.

The RBI is the banker to the government and manages its debt issuances, it is also responsible to maintain orderly conditions in the government securities markets (G-Sec). RBI manages the foreign exchange under the Foreign Exchange Management Act, 1999. It intervenes in the FX markets to stabilize volatility that facilitates international payments and trade, and development of the foreign exchange market in India.

The RBI also regulates and controls interest rates and liquidity in the money markets which have a profound impact on the functioning of other financial markets and the real economy.

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What is Role of RBI in Financial Market? Functions & Responsibilities!

3. Insurance Regulatory and Development Authority of India (IRDAI) 

irdai logo

The Insurance Regulatory and Development Authority of India (IRDAI) is an independent statutory body that was set up under the IRDA Act,1999. Its purpose is to protect the interests of the insurance policyholders and to develop and regulates the insurance industry.  It issues advisories regularly to insurance companies regarding the changes in rules and regulations.

It promotes the insurance industry but also controls the various charges and rates related to insurance. As pf 2020, there are about 31 general insurance and 24 life insurance companies in India, who are registered with IRDA.

The three main objectives of IRDA are:

  1. To ensure fair treatment and protect the interests of the policyholder.
  2. To regulate the insurance companies and ensuring the industry’s financial soundness.
  3. To formulate standards and regulations so that there is no ambiguity.

Some important functions of IRDA are:

  1. Granting, renewing, cancelling or modifying the registration of insurance companies.
  2. Levying charges and fees as per the IRDA act.
  3. Conducting investigation, inspection, audit, etc. of insurance companies and other organizations in the insurance industry.
  4. Specifying the code of conduct and providing qualifications and training to intermediaries, insurance agents etc.
  5. Regulating and controlling the insurance premium rates, terms and conditions and other benefits offered by insurers.
  6. Provides a grievance redressal forum and protecting interests of the policyholder.

4. Pension Funds Regulatory and Development Authority (PFRDA)

pfrda logo

The Pension Fund Regulatory and Development Authority (PFRDA) is a statutory body, which was established under the PFRDA act, 2013. It is the sole regulator of the pension industry in India. Initially, PFRDA covered only for employees in the government sector but later, its services were extended to all citizens of India including NRI’s. Its major objectives are – to provide income security to the old aged by regulating and developing pension funds and to protect the interest of subscribers to pension schemes.

The National Pension System (NPS) of the government is managed by the PFRDA. It is also responsible for regulating custodians and trustee banks. The Central Record Keeping Agency (CRA’s) of the PFRDA performs record keeping, accounting and provides administration and customer services to subscribers of the pension fund.

Some functions of PFRDA are:

  1. Conducting enquiries and investigations on intermediaries and other particpants.
  2. Increasing public awareness and training intermediaries about retirement savings, pension schemes etc.
  3. Settlements of disputes between intermediaries and subscribers of pension funds.
  4. Registering and regulating intermediaries.
  5. Protecting the interest of pension fund users.
  6. Stipulating guidelines for investment of pension funds.
  7. Formulating code of conduct, standards of practice, terms and norms for the pension industry.

5. Association of Mutual Funds in India (AMFI)

amfi logo

The Association of Mutual Funds in India (AMFI) was set up in 1995. It is a non-profit organization that is self-regulatory and works for the development of mutual fund industry by improving professional and ethical standards, thus aiming to make the mutual funds more accessible and transparent to the public. It provides spreads awareness vital information about mutual funds to Indian investors.

AMFI ensures smooth functioning of the mutual fund industry by implementing high ethical standard and protects the interests of both – the fund houses and investors. Most asset management companies, brokers, fund houses, intermediaries etc in India are members of the AMFI. Registered AMC’s are required to follow the code of ethics set by the AMFI. These code of ethics are – integrity, due diligence, disclosures, professional selling and investment practice.

The AMFI updates the Net Asset Value of funds on a daily basis on its website for investors and potential investors. It has also streamlined the process of searching mutual fund distributors.

6. Ministry of Corporate Affairs (MCA)

mca logo minstry of corporate affairs

The Ministry of Corporate Affairs (MCA) is a ministry within the government of India. It regulates the corporate sector and is primarily concerned with the administration of the Companies Act, 1956, 2013 and other legislations. It frames the rules and regulations to ensure the functioning of the corporate sector according to the law.

The objective of MCA is to protect the interest of all stakeholders, maintain a competitive and fair environment and facilitating the growth and development of companies. The Registrar of Companies (MCA), is a body under the MCA that has the authority to register companies and ensure their functioning as per the provisions of the law. The issuance of securities by the companies also comes under the purview of the Companies Act.

Closing thoughts

In this article, we discussed the Regulatory Bodies in Indian Financial SystemThere are many regulatory organizations in India that ensure the smooth functioning of the financial system.

RBI is the regulator of the banking sector, SEBI is the primary regulator of the stock markets, IRDA regulates the insurance industry, PFRDA regulates the pension fund industry. The AMFI sets ethical standards for the mutual fund’s industry and the MCA regulates the corporate sector according to the many legislations.

The Union Budget 2021 Highlights!!

The Union Budget 2021 Highlights

The Finance Minister Nirmala Sitharaman announced the Union budget for 2021-2022 . This budget is of great significance as it comes amid an economic recession caused by the coronavirus pandemic. All eyes were on the budget with hopes that it would provide relief and help in lifting the economy. The budget received a positive response from the markets and many experts have termed it to be pragmatic, given the underlying circumstances. Given below are some of the key highlights from this budget.

The Union Budget 2021 Highlights – Healthcare

Against the backdrop of the ongoing pandemic, healthcare took the center stage in the Budget. A total of Rs. 2,23,846 crores have been allocated for this sector, this is an increase of 137% from the previous year. An amount Rs. 35000 crores will be spent on vaccines in 2021-22, adding more funds if need arises. A new scheme titled the Prime Minister Aatmanirbhar Swastha Bharat Yojana will started with an outlay of Rs. 64,182 crores over the next six years. This will aim to strengthen the healthcare services in India. This scheme includes setting up Health wellness centers, public health labs and improving the National center for disease control (NCDC’s). Swachha Bharat Mission 2.0 will be launched with an allocation of Rs. 1,41,678 crores over the five years. The supplementary Nutritional Programme will be merged with the POSHAN scheme and a new mission named POSHAN 2.0 will be launched to improve nutritional delivery and outcomes. An increase in healthcare spending is the need of the hour and it will help build capacity and better capability to manage future health related crises.

The Union Budget 2021 Highlights – Infrastructure

The National Infrastructure Pipeline (NIP) will be expanded to 7400 projects, this programme aims to invest in social and economic infrastructure spanning across sectors, to boost growth. A whopping Rs. 5.54 lakh crore has been allocated for capital expenditure in 2021-22, an increase of 34.5% from last year. Furthermore more than Rs. 2 lakh crore will be provided to state governments and autonomous bodies for capex. To provide long term funding for the infrastructure sector, a professionally run Development Finance Institution (DFI) will be set up. A sum of Rs. 20,000 crores has been allocated for the DFI and it is expected that the DFI will build a loan portfolio of Rs. 5 lakh crore within the next three years. Monetisation of potential brownfield assets will be undertaken, as part of this five roads worth Rs.5000 crore will be transferred to NHAI InvIT and transmission assets worth Rs.7000 crore will be transferred to PGCIL. Amendments will be made to the law, to enable foreign portfolio investors (FPI’s) to provide debt finance to REIT’s and InvIT’s. 8500 Km of new highways will be built in different states and there is a total allocation of Rs. 1.18 lakh crore to augment the road infrastructure. Indian Railways have a national rail plan for 2030’s and a total of Rs. 1,07,000 crore has been allocated for railway capex. Further, Rs.18000 crore is allocated to increase the public bus transport services in cities.

The Union Budget 2021 Highlights – Financial sector

The Finance minister proposed that there will be a new securities market code that will consolidate provisions of four different regulations. Insurance FDI will be amended to increase the FDI limit for insurance companies from 49% to 74%. This will provide foreign investors with more control and ownership but with necessary safeguards. To reduce the stress of bad loans from the banking sector, the government will set up a ‘bad bank’ which will be in the form of an asset reconstruction company and an asset management company (AMC’s). As part of its recapitalization plan, the government will further infuse Rs. 20,000 crore into the banking sector. These measures will help the banks to clean up their balance sheets and improve their ability to lend thus increasing credit growth. The budget announced the governments intention to increase the privatization drive in the non strategic sectors. A roadmap for divestment of some public sector companies like LIC and Air India has also been laid out. In FY200 , The government aims to generate Rs. 1.75 lakh crore through divestments. To incentivize more startups, one-person companies can be incorporated without any restrictions on turnover or paid up capital. The one person company can be easily converted to other kind and the residency limit has also been reduced. A Rs.1500 crore scheme will be launched that would provide financial incentive to boost digital transactions. Furthermore, to encourage the development of new financial technologies, a fintech hub will be set up at the GIFT city.

The Union Budget 2021 Highlights – Agriculture

The total agricultural credit target for FY2022 has been increased to Rs. 16.5 lakh crores. The allocation towards a rural infrastructure development fund has been increased to Rs. 40,000 crores. The agriculture infrastructure fund of Rs. 1 Lakh crore will now also be available to upgrade infrastructure in the Agriculture Produce Market Committee (APMC) mandi’s. Five more fishing harbors will be established and the government will set up sea weed parks to promote sea weed farming. More than 1000 mandis will also be included into the e-Nam marketplace.

The Union Budget 2021 Highlights – Taxes

There were no changes made to the income tax rates
Senior citizen above the age of 75, who depend on pension or interest income, will be exempted from paying income tax
Faceless tax resolution mechanism will be set up for small taxpayers.
Aircraft companies will get a tax exemption for one year.
To tax holiday for startups has been increased for another one year and there will be a one year exemption on capital gains from investments in startups.
There will be an agricultural development on some items.
Affordable housing projects will get a tax exemption for one year

The Union Budget 2021 Highlights – Government Financials

Gross expenditure for FY 22 is expected to be 34 lakh crores, for FY21 it is 34.5 lakh crore.
The fiscal deficit for FY21 is revised to be 9.5% of GDP and is expected to reduce to 6.8% of GDP in FY22
The Government will be borrowing Rs.80,000 crores in the remaining two months of this fiscal year. The borrowing for FY22 is expected to be Rs.12 lakh crores.

To Conclude…

The Finance Minister has been able to deploy the resources in the best way possible. Its the classic case of making the best of available resources. And considering its a season of comebacks (Example : recently concluded Border Gavaskar trophy). And there is only way up for the Indian economy.

Union Budget 2021 – Detailed Explanation

Union Budget 2021 – Detailed Explanation:

In December the Finance Minister was quoted saying “Hundred years of India wouldn’t have seen a budget being made post a pandemic like this”. She presented the budget for a third time yesterday at the Parliament. Although the budget was well received we take a closer look at it in order to better understand and assess if it can rescue an economy in crisis.

The Finance Minister was faced with a very challenging task where she was expected to help the economy make up for the 8 quarters of slowdown and 4 quarters of Covid-19. In such a situation one would brace for the worst with increased taxes and government spending directed towards quick relief measures. The Finance Minister began her budget speech in Parliament at 11 am highlighting the difficulties of Covid-19 but moved on to provide an optimistic note by providing a quote from  Rabindranath Tagore where she referred to the post-Covid world as the “dawn of a new era”.

She commenced her speech using a very first of its kind paperless approach with a Made in India tablet. Sitharaman stated that the budget proposals rest on 6 pillars: Health and well-being, physical and financial capital and infrastructure, inclusive development for aspirational India, reinvigorating human capital, innovation and R&D, and minimum government and maximum governance.

She first started off by addressing the situation the country was stuck in with a 9.5% (fiscal deficit). One of the highest figures ever. A transparent and courageous step surely to be worthy of praise. The FM went onto project 6.8% for FY22 with govt plans to bring it down to under 4.5%. But what followed took many by surprise. The Budget did not include the harsh measures that were expected. Instead, the FM adopted a policy where it focused on pushing for growth by strengthening infrastructure and focussing on the long term prospects. Below we will be understand Union Budget 2021 – Detailed Explanation

1.Push to develop Healthcare

 As expected the FM targeted the problem at hand regarding vaccines. She announced a Rs 35,000 crore outlay for the COVID vaccine in the fiscal beginning April 1st. In addition, the FM also announced Pradhan Mantri Atma Nirbhar Swasth Bharat Yojna and marked Rs 64,180 crore for the new scheme for over six years to combat new and emerging diseases and developing capacities of primary, secondary and tertiary healthcare systems. 

The spending on healthcare this year was hiked by 137%  to over Rs 2.23 lakh crore. This was more than necessary as India being 2nd on the list for the highest coronavirus cases after the United States. Unfortunately, however, India only spends 1.8%(2020-21) of GDP on health, among the lowest for any major economy. This has resulted in India being one of the top 10 nations with the highest Out-of-Pocket-Expenditure (OOPE). The increase in spending this year makes up  3% of GDP and can bring down the OOPE according to the Economic Survey 2021.

The survey also ranked India 145th out of 180 countries based on the quality and access of healthcare. Countries ranked below were  Nepal, Pakistan, sub-Saharan countries, and some pacific islands. It cannot be stressed enough how necessary this announcement was especially in recent times.

2. Scalping 

Normally when in times of crisis or when governments are desperate for growth they often willfully ignore the consequences their actions may have on the environment. But the FM has not overlooked this and addressed concerns of air pollution, sanitation, and clean water. A very important announcement made by the FM for a voluntary vehicle scrapping policy to phase out old vehicles. Here personal vehicles will undergo a fitness test in automated centers after 20 years while the commercial vehicles will undergo the test after 15 years. By doing so the FM has also set an example for leaders around the world.

The scalping of vehicles would prove to be beneficial for the environment as older vehicles licensed with worse off emission policies would be phased out. This would make way for newer vehicles which by using technological advancements reduce emissions. In addition, this also promotes a cyclical trend in the industry for phasing out and purchase of new vehicles. This announcement led to the increase in share prices of companies in the automobile industry.

3. Infrastructure

The government has dedicated a significant portion of its spending towards developing infrastructure. The focus currently will be on roads, railways, and power. In addition, the budget also has given a push to various PLI (Production-linked incentive) schemes. The government aims to spend Rs 1.97 lakh crore for this purpose, starting this fiscal. This is in addition to the Rs 40,951 crore announced for the PLI for electronic manufacturing schemes. This will lead to the attraction of global players in the Indian manufacturing sector as the government is planning to offer plug-and-play infrastructure to the companies willing to come to India.

Infrastructure projects have also been focused on Tamil Nadu, Kerala, Assam, and West Bengal considering the upcoming Assembly elections in the states.  

4. Disinvestment

A very important announcement as this would be the main source of funds for financing the infrastructure projects. Although there have been talks for disinvestment of various government entities the FM has now set a deadline. The companies include BPCL, Air India, Pawan Hans, IDBI Bank, Concor to be completed in 2021-22.  Two PSU banks are to be privatized among others. In addition to this LIC IPO will be held this year.

For successful disinvestment, it is important that the markets hold their current good form. 

The FM also announced a bad bank proposal, where the government will set up an Asset Reconstruction and Management Company for Stressed Assets to take over bad loans.

5. Taxes

One of the best moves by the government has been avoiding any major changes on the direct tax front. The search for revenues could further delay the recovery process. On the direct tax front, the government provided relief for senior citizens over 75 years. They no longer have to file income tax returns.

Instead, the government has added cess but the FM announced that they will be imposed post adjustments done to customs duty. This will be adjusted to ensure that no effects are felt by consumers. The cess has been set as an ‘agriculture infrastructure and development’ cess. These will be charged at 

  • Rs 2.5 per litre Agri infra cess on petrol, Rs 4 on diesel.
  •  2.5% on gold, silver, and dore bars; 
  • 35 pc on apples.
  •  30% on Kabuli chana, 10% on peas, 50 pc on Bengal gram/chickpeas, 20 pc on lentil ; 
  • 5 pc on cotton

The government also has halved the time frame for reopening of income-tax assessment cases from 6 years to 3 years. For reopening of serious tax evasion cases up to 10 years, the government has put in a monetary limit of cases involving over Rs 50 lakh in a year. This is meant to reduce tax harassment of income taxpayers.

The FM also announced changes to customs. Between increasing consumption and protecting local producers the FM has opted for the latter. The FM announced hikes on customs for refrigerators and AC, auto-components, mobile parts, etc. The long-term goal here seems to be encouraging companies to produce in India instead of importing which would only make their products dearer to customers. 

5. Social security for gig workers

Another significant announcement by the FM is the extension of social security benefits will be extended to gig and platform workers, This includes 15 million gig workers in the country who work for companies like Uber, Ola, food delivery in Swiggy and Zomato, and contract workers in IT and software firms.

6. FDI in insurance companies

The Finance Minister announced a hike in the FDI limit in Insurance companies from 49% to 74%. This will lead to an increase in capital inflow into insurance companies aiding the growth of the sector.

Some sections that were not covered in Union Budget 2021 – Detailed Explanation

One sector which had high prediction as the focus of the budget was that of Defence. Especially after considering the turmoil on the Indo-Chinese borders. But the government has allocated Rs 3,47,088 crore to the sector. Almost the same as the Rs 3,43,822 crore last year with only a 2% increase.

The Airline and the Tourism sector were the worst affected during the pandemic. But surprisingly apart from a Tax exemption for aircraft leasing companies nothing in the budget was directed towards these two sectors.

Although the budget does give high hopes over the next 5 years there is little or no attention directed towards the poor and lower sections including daily-wage workers who were the worst affected during the pandemic. The budget also does not direct much attention towards MSME’s which form a majority of businesses in the country and is the biggest employer in the country which too was severely affected by the pandemic.

To conclude the Union Budget 2021 – Detailed Explanation

On the whole, the budget has held itself to higher standards than those released in the previous years by the government. It is evident that FM has decided the avoid focussing on particular sectors to provide quick relief measures but instead aimed at picking the economy up by focussing on growth for the long term. The growth-oriented budget was very well received especially by the equity markets. Indian equities gained the most on a budget day since 1997. Thanks to FM for leaving out any tax hikes. The S&P BSE Sensex ended 5% higher and the Nifty 50 gained 4.7% on budget day. It is evident that the FM has adopted a conservative approach. Although it has already laid good groundwork for the next 5 years. Its final assessment depends on its execution! 

What are Economic Indicators Leading, Lagging & Coincident Indicators examples

What are Economic Indicators? Leading, Lagging & Coincident Indicators!

Understanding What are Economic Indicators – Leading, lagging, & coincident: The health of the economy impacts all businesses in it. It is extremely important for investors to keep track of the current state and anticipate future changes in the economy in order to make informed investment decisions.

The economy is a complex phenomenon, and investors rely on many economic indicators to understand it. Any single economic indicator is not enough; investors have to consider many indicators in trying to grasp the big picture.

Economic indicators are classified as leading, lagging or coincident depending on whether the indicated change in economic activity will happen in the future, has already happened or is currently underway. In this article, we describe some of the most important indicators used by investors in Indian financial markets.

A) Leading Indicators

Leading indicators are forward-looking in that they provide a signal before a change in the economy itself. This makes leading indicators extremely useful to forecast and predict the economic scenario in the future.

These indicators are difficult to estimate and may be misleading at times by producing false signals, so they must be used cautiously. Some popular leading indicators are –

1Bank Credit growth

Bank credit refers to the lending of funds by scheduled commercial banks (SCB) to various sectors in the economy. Non-food credit forms a bulk of the total credit and comprises loan given to different sectors (Industry, Agriculture and services) along with personal loans to individuals.

The Reserve Bank of India (RBI) collects data on bank credit on a monthly basis from major commercial banks which together accounts for almost 95% of the total non-food credit. High growth in bank credit indicates that banks are lending more and corporates are confident to borrow and expand as well as high consumer sentiment.

A high credit growth translates into higher economic growth, but if the bank credit growth is consistently low or negative, it could signal an impending economic slowdown.

2Capacity Utilization

Capacity utilization is an indicator of slack in the manufacturing sector provides insights into the state of the business cycle. In other words, it tells us as to what extent the production capacity in the economy is idle or used. It is measured as a proportion of the actual output produced to that of potential output which can be produced with the installed capacity.

Rising levels of capacity utilization indicate that production facilities are being used and increased output contributes positively to economic growth, whereas if the utilization levels are declining, it signals deceleration in the economy.

The RBI collects data on capacity utilization in the manufacturing sector through the OBICUS survey and releases it on a quarterly basis.

3Yield curve

Yields are the interest rates of bonds traded in the market. The sovereign yield curve is a graphical representation of the interest rates of government bonds with different maturities. It describes the relation between short term interest rates and long term rates and inherently captures the market’s expectation of future interest rates.

The yield curve provides vital insights into the macroeconomic conditions. Higher long term interest rates than the short term rates lead to an upward sloping yield curve. Upward sloping yield curve indicates higher interest rates in the future.

High inflation and economic growth would create demand for money, thus raising interest rates. Similarly, an inverted yield curve indicates an economic slowdown characterized by low inflation and falling interest rates. The data on interest rates for different maturities of bonds is determined by market forces and is available at a high frequency.

4. Durable goods consumption

Durable goods are those goods that have a longer life, and high economic value. They represent a significant portion of the total retail consumption expenditure. Some examples of durable goods are furniture, jewellery, automobiles etc.

The demand for these goods is an indicator of the overall strength of demand in the economy. Slow growth or fall in consumption expenditure of durables signals a slowdown in the economy and weakness in aggregate demand. The most tracked consumer durables are two-wheeler and car sales. Tractor sales are considered an indicator of rural demand.

5. Confidence index

Consumer confidence measures the degree of confidence of consumers on the state of the economy. If consumer confidence is high, they would spend and make more purchases adding to strong aggregate demand and economic growth.

Low confidence would suggest that consumers prefer to save and spend less, indicating a fall in consumption expenditure. Similarly, business confidence measures the optimism of businesses regarding economic strength.

The Reserve Bank of India (RBI) releases monthly consumer confidence index and quarterly Business expectations index by conducting surveys of households and businesses.

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How Does The Stock Market Affect The Economy?

B) Lagging Indicators

Lagging indicators signal a change in the economy, usually after the change has taken place. They are not very useful in predicting future outcomes but are used as signals for conforming to the ongoing scenario.

Sometimes, an unexpected value of a lagging indicator may cause investors to change their outlook and prices respond accordingly.

1. Gross domestic product

The most popular measure for the size of the economy is the Gross Domestic Product (GDP).It is the total value of all goods and services produced within a country in a particular time period. The growth rate of GDP indicates the health of the economy.

The GDP data for India is calculated quarterly and is released by the Central Statistics Office. High growth in GDP indicates growth in income and strong aggregate demand, and corporates are likely to perform better in such an environment.

Since the GDP is released only quarterly, it only acts as a reinforcement signal to the current scenario; stock prices adjust much quickly to economic changes even before the GDP numbers are announced.

indian gdp source statista

(Image Credits: Statista)

2. Unemployment rate

Another measure of economic performance is the Unemployment rate, which is measures the number of people unemployed as a percentage of the total labour force. Higher unemployment indicates a poor state of the economy – companies less willing to hire, reduced aggregate demand and further layoffs. It has been observed that the unemployment rate is negatively correlated to the prices in the stock market.

In India, the Centre for Monitoring Indian Economy (CMIE), releases monthly estimates for the unemployment rate. The unemployment data is reported with some time lag, and a high number may be a result of an already going economic slump. In India, stock prices do not react much to unemployment indicators as a lot of information is already factored in.

3. Balance of trade

Also called the Net exports, Balance of trade refers to the difference between a country’s total value of exports and imports. It tells us whether the country is in a trade surplus (higher exports) or trade deficit (higher imports).

A surplus is generally desirable as it indicates more money flowing into the country. If the surplus is due to high exports, it signals a strong demand for the country’s exports from other countries. A high trade deficit is a negative indicator of economic growth, and markets react negatively.

A country with a high trade deficit is exporting less and importing more, money flows outside the country, leading to a significant increase in debt. A high deficit also causes a fall in the value of the domestic currency.

Sometimes, too high a trade surplus can also be a cause of worry. If the trade surplus is resultant of weak imports, it may signal weak domestic demand. The data on exports and imports is released monthly by the Ministry of Commerce, Government of India.

C) Coincident Indicators

Coincident indicators change simultaneously, along with the economic conditions. These indicators help in understanding current economic conditions but do not have a predictive value. Coincident indicators are beneficial to investors as it provides real-time information on how the economy is performing.

1. Manufacturing activity

Industrial/manufacturing activity is sensitive and quickly adjusts to the current economic scenario. Increased industrial production indicates that there is a strong demand for goods, and since the industrial sector is closely linked to other sectors of the economy, higher industrial activity correlates positively with growth in other sectors.

An index that tracks the growth in manufacturing activity in the economy is theIndex of Industrial Production (IIP). The IIP is calculated monthly and released by the Central Statistics Office. Low or negative growth in the IIP is bad for corporate sales and profits; thus, stock prices fall in reaction to it.

Another forward-looking measure of industrial activity is the Purchasing Managers Index (PMI). PMI ranges from 0 to 100. A value below 50 represents a contraction, whereas a value above 50 represents an expansion compared to the previous month. A separate PMI index is also calculated for the services sector.

2. Short term interest rates

Short term interest rates are very sensitive to current economic conditions and are strongly influenced by the policy rate (Repo rate) set by the Reserve Bank of India. A rise in short term interest rates signals higher economic activity as there is more demand for money.

Similarly, lower interest rates mean that the economy is weak, and the central bank reduces its repo rate in order to spur aggregate demand. There are many short term interest rates that are determined by the market forces in the money market. The policy rate of the RBI is decided on a bi-monthly basis.

3. Inflation

This is a measure of the change in prices of goods and services over a period of time. A little positive inflation signifies strong demand that promotes economic growth, whereas very low or negative inflation is a signal of weak demand and usually coincides with low growth in the economy.

In developing countries like India, high inflation can be a cause of worry as it reduces the real disposable income of consumers and businesses may face a reduction in their profit margins due to an increase in the cost of inputs. Various indices are used to measure inflation. An index tracks the changes in the prices of a basket of goods and services.

The Consumer Price Index (CPI) is the primary index that measures retail prices of goods and services like food, transportation etc. Another index is the Wholesale Price Index (WPI), which measures the prices at a wholesale level. The data for both – CPI and WPI is released by The Central Statistics Office.

india-inflation-cpi

(India Inflation CPI | Image Credits: Trading Economics)

Closing Thoughts

The economic conditions are an important factor that influences prices in the stock market. To understand the economy’s current and future prospects, investors use many economic indicators when making investing decisions.

Most important are the leading indicators, which provide insights about the future economic scenario. The lagging indicators reinforce the economic trends and coincident indicators provide investors with real-time information about the economy.

Why do most Indians not pay Taxes cover

Why do most Indians not pay Taxes – Why ITR filings are so Low?

Debugging why do most Indians not pay Taxes: In one of his lectures, Clinical psychologist Jordan Peterson posed a question to his students- What happens if we all stop paying taxes? He comes to the conclusion that there is nothing much that the government could do in such a scenario. After pondering a little on the question that the government would find itself outmanned to go after every person not paying his taxes. Although Mr. Peterson comes to the conclusion that we pay taxes because we a good people. 

If we take the case of India, the Prime Minister announced earlier this year that only 1.5 crore people of the country pay their taxes. What does this mean? Is this because of a possible boycott? Today, we analyze what this statement means and why the numbers are so low?

What Percent (%) of Indians pay taxes?

The income tax department later clarified the Prime Ministers’ statements in a series of tweets stating that actually only 1.46 crore people pay tax on their income in the country. The Indian auto industry had sold more two-wheelers (21 million) than this figure in 2019. 

The CBDT tweeted that  “… 5.78 crore individuals filed returns disclosing income of the financial year 2018-19”. Of these,1.03 crore have shown income below Rs 2.5 lakh and 3.29 crore individuals disclosed taxable income between Rs 2.5 lakh to Rs 5 lakh, it added. Of the 5.78 crore returns filed during this financial year,4.32 crore individuals have disclosed income up to Rs 5 lakh. Only  3.16 lakh individual taxpayers have disclosed income more than Rs 50 lakh. In addition, they also stated that the number of individual taxpayers who have disclosed income above Rs 5 crore in the whole of the country is only around 8,600. These taxpayers created Rs 24,23,020 crore gross tax revenue for the government in the budget 2020.

Who bears the brunt of the taxes?

The Budget speech of 2018-19 had noted that on average a salary earner pays three times more income tax than a non-salaried taxpayer (Rs 76,306 versus Rs 25,753). This is however is not because the entrepreneurial class earns lesser than the salary citizens.

The tax department believes the tendency to evade tax is higher among the nonsalaried. This resulted in 0.26% of the population paid close to four-fifths of the individual income tax in the Assessment Year. 

Analyzing the 1%?

Before jumping to any conclusions let us analyze the 1% that actually pays taxes. According to The Economic Survey of 2015-16,“For the level of democracy, India’s ratio of taxpayers to voting-age population is significantly less than that of comparable countries. This implies that while at present about 4% of citizens who vote pay taxes, the percentage should be about 23″. This seems like a gigantic figure in comparison to reality. But let us take a closer look. 

Out of the total population, a significant portion includes proportions below the age of 18. India has one of the largest proportions in the younger age groups in the world at 41%. In addition to this women make-up, half of the population but have very low participation in the workforce. Their participation stands at just over 25%. This excludes 75% of women or 37.5% of the population from the workforce.

In addition to this agricultural income is not taxable in India. This puts a majority of the i.e. 50% of the workforce not liable to pay taxes. This puts the population liable for tax at a little over 10%. And after considering that millions are automatically exempt. This is because they simply are too poor reducing the figure by a large chunk. This gives a new perspective to the 1.46% liable to pay taxes instead of being compared to 100% of the population.

Why do most Indians not pay Taxes?

Why do most Indians not pay Taxes?

Why do most Indians not pay Taxes? cartoon

( Source: The Wire)

One of the major reasons why individuals prefer not to pay taxes is because of the question, “Where is my tax money going?”. This is hard to answer when every year a new scam or case of corruption breaks out involving politicians. In addition to this thousands of crores are spent on creating statues and initiatives like the Central Vista project. The justification for this is given by stating that they add to the national pride. But this too passes when one’s vehicle crosses another pothole.

In addition, the healthcare system and education seem non-existent in some states, the judiciary still works at a slow pace and the system is still riddled with corruption. This makes the salaried middle class often feel cheated. 

(Source: The Wire)

The Indian economy has always traditionally preferred cash as the mode of payment. This makes it easier to evade taxes as a majority can also under-report their incomes. Vinod Gupta, the vice president of the market’s traders’ association, confirms that income tax evasion is prevalent among businesses that rely on cash. He says the small shop owners and stall vendors who make up about 25 percent of the market evade paying altogether. On being further questioned on the role of tax inspectors investigating the local businesses he states that their services are hired through bribes. 

The Economic Survey of 2015-16 pointed out: “If the state’s role is predominantly redistribution, the middle class will seek—in professor Albert Hirschman’s famous terminology—to exit from the state. They will avoid or minimize paying taxes; they will cocoon themselves in gated communities; they will use diesel generators to obtain power; they will go to private hospitals and send their children to private educational institutions.” Luckily for the government, this is not possible. 

Another reason also lies in the fact that a majority of the population that depends on agriculture is not liable for any taxes. This is a very necessary initiative to support the majority of poor farmers. But it fails its purpose when there is no limit set to the tax-free nature allowing rich farmers to further avoid taxes.

Rich farmers can not only not pay taxes but also receive a subsidy. This is given for their inputs like water, seeds, and electricity. Considering the current upheaval due to the Farm Bills no changes can be expected in this area anytime soon.

Closing Thoughts 

In this post, we tried to look into Why do most Indians not pay Taxes.  Anyways, for any changes to be seen in the majority of the individual’s tax behaviors it is important for the government to firstly show citizens a link between good government- services and the duty to pay taxes. Otherwise, an individual would keep trying to find loopholes in the system to avoid taxes.

That is until he sees an answer to his question “Where is my tax money going?”.

What is Repo Rate, Reverse Repo Rate and Current Repo Rate cover

What is Repo Rate, Reverse Repo Rate and Current Repo Rate?

Understanding what is Repo Rate, Reverse Repo & Current Repo: A number of times in a year the newspapers are filled with headlines of the RBI changing the Repo rate. Unbeknownst to most the Repo rate is extremely crucial for the common man. This is because the Repo rate impacts interest rates on home loans, car loans, etc.

Today we take a closer look at this Repo rate in order to better understand it. Here, we’ll discuss what is Repo rate, what is reverse repo rate, how they are used and how does the RBI use the Repo rates to control inflation. Let’s get started.

What is Repo Rate?

Many of us may already know that the RBI i.e. the Central Bank of India prints currency notes as they all bear the RBI Governors signature. But the RBI also has other primary functions which include:

  • Controlling the money supply in the economy 
  • Maintaining the cost of credit i.e. the price the economy has to pay to borrow money.

One of the tools that help RBI in performing these functions is the Repo Rate.

In order to fulfill our additional financial requirements, we at times take loans from commercial banks. These banks lend us money for a certain charge of interest on these loans. Similarly, these commercial banks in times of cash crunch also can approach the RBI for loans. The RBI lends money to these banks at an interest rate This interest rate is known as the Repo Rate. Repo here stands for ‘ Repurchasing Option’ or ‘Repurchase Agreement’.

In other words, the Repo Rate is the rate at which the RBI lends money to commercial banks in the event of any shortfall of funds. The RBI lends money to banks for the short term generally against government securities. Here the banks provide eligible securities such as Treasury Bills to the RBI while availing short term loans.

What is Reverse Repo Rate?

The Reverse Repo Rate is the opposite of the Repo Rate. Just like when we deposit money in a bank we receive interest on it. When banks deposit their excess money with the RBI they receive interest on their deposits. This interest is known as Reverse Repo Rate. Here the commercial banks earn an interest rate on government securities purchased from the RBI for the given period. These deposits are made for short periods. 

The difference between the Repo Rate and the Reverse Repo Rate is the income earned by the RBI. 

What is the Repo and the Reverse Repo Rate used for?

The Repo and the Reverse Repo rates are the main tools used by the RBI to keep inflation in check. Inflation refers to a rise in the price of goods and services that can be of daily or common use. Certain levels of inflation is part of economic growth. But at times inflation gets out of hand and may hurt the economy When this happens the RBI steps. 

How does the RBI use the Repo rates to control inflation?

In the case of inflation, the RBI INCREASES the repo rate. This now means that in order for the banks to borrow from the RBI they will have to pay more in interest(repo rate). This disincentivizes the banks from borrowing. When the commercial banks cannot borrow additional money it reduces the money supply in the economy which curbs inflation.

The additional money supply is curbed by the effects being carried forward to the people. When it becomes expensive for the commercial banks to borrow money this effect is transferred to the public. Now it is also more expensive for the common man to borrow from banks as banks have increased the rate of interest at which they lend. 

As the Repo rate takes care of the lending portion the Reverse Repo takes care of the deposits. Here the RBI also INCREASES the Reverse Repo Rate. This encourages commercial banks to park their excess cash with RBI. This too is transferred to the public. The commercial banks now offer higher interest rates on deposits further reducing the money in the economy checking inflation.

How does RBI use the Repo rate to increase growth?

In a situation where the inflation is in check but the economic growth of the country has cooled off too much, the RBI opts to DECREASE the Repo and the Reverse Repo rate. The lower Repo rate means that borrowing is now cheaper from the RBI. This encourages commercial bank borrowing. These benefits are transferred into the economy where the people can now take loans at cheaper rates from the banks. This leads to extra cash in the economy spurring economic growth. 

The RBI also DECREASES the Reverse Repo Rate which discourages commercial banks from keeping their additional money with the RBI as it would lead to lower interest received. This is also transferred to the public where the public would prefer not to keep deposits with commercial banks as they too would offer reduced rates. This leads to people looking for alternative investments or using additional cash for consumption. 

ALSO READ

Allowing Banks for Business Houses by RBI: Is this the Right Move?

What is the Current Repo Rate?

The Repo Rate keeps changing from time to time according to the needs of the economy. The current Repo Rate is set at 4.00%. The Repo rate stood at 5.15% till 27th March 2020 when it was changed to 4.40% owing to the reduced economic growth due to the coronavirus.

The RBI then saw the need to further reduce the rate to 4.00%. The Indian GDP was among the worst hit in the world moving to negative figures. 

what is opportunity cost and how it is useful in investing

What is Opportunity Cost? And how it is used in Investing?

Understanding Opportunity cost and its usefulness in investing: What factors do you consider before you take any decision that involves money? These factors could include affordability, returns, usefulness, pros, and cons, etc. But have you ever considered that simply not choosing an option too has a cost associated with it?

Today we take up an aspect of economics that is generally overlooked when it comes to decision making i.e. Opportunity Cost. We also try and find out its relevance in investing.

What is Opportunity Cost?

In microeconomic theory, opportunity cost or alternative cost is the loss of potential gain from other alternatives when one particular alternative is chosen over the others.

In simpler terms, it refers to the potential benefit that a person misses out on when they choose one alternative over the other. The objective of opportunity cost is to ensure the efficient usage of scarce resources. It exists even when you make no choice at all. It also uncovers the loss of not making a decision. 

What is Opportunity Cost?

Opportunity cost is generally unseen and can be easily overlooked as they are not accounted for in the financial statements. However, management or Investors use this concept regularly while making decisions that involve multiple options.

In reality, the opportunity cost theory is a very important concept. This applies not only to investors and businesses but also to individuals in their personal life. 

Real-life Examples of Opportunity cost

Let us take an example that includes one of our peers. He/She has decided to pursue an MBA worth Rs. 20 Lakhs (Tuition plus boarding and dining cost) for two years. She came to this decision after receiving a government scholarship of Rs. 5 Lakh. How much cost do you think she will be paying for if she actually goes through with it?

Most of us would have already arrived at the conclusion that she will be liable to pay a cost of Rs. 15 Lac. The true cost here is 15 Lakh (as she has also earned her scholarship) plus the income he/she will have to forego by attending an MBA college. If your peer would have earned Rs. 6 Lac/year (ignoring hikes or bonuses received in this period) by working then the true cost would amount to Rs. 27 Lakh.

Many of us would ignore the opportunity cost of the peer losing out on potential income. In order to arrive at an educated decision, the peer would have to compare the cost of education plus the forgone income vs. the benefits she would receive after receiving an MBA. 

ALSO READ

What is Sunk Cost Fallacy? And How it Can Affect Your Decisions?

How to calculate the opportunity cost?

We calculate the opportunity cost by comparing the returns of two options. The following formula illustrates an opportunity cost calculation.

Opportunity Cost = Return of Most Lucrative Option – Return of Chosen Option.

Take for example you are provided with the option of investing Rs. 1 Lakh. You are thinking of investing in a Blue Chip Mutual fund that provides a 10% return. You also have the option to invest in a Small Cap Fund that could provide a 20% return.

Here, by applying the formula above we would arrive at:

Opportunity Cost = 20,000- 10,000 => 10,000.

The Ratio of Opportunity Cost

We can also use the ratio of opportunity cost. This uses proportions to demonstrate the value of each choice. This is done by illustrating what has been sacrificed against what’s been gained from the alternative. 

Opportunity cost = What you sacrifice by making the choice / What you gain by making the choice

Taking the same example used earlier where we invest in a Blue Chip mutual fund as Small Cap funds are risky.

The Opportunity Cost is = 20,000/10,000 => 2/1 = 2.

Opportunity Cost and Investing

Investing is all about parking money in a financial product with the hopes of making more money than what was invested. Everyday investors are faced with options where they have to decide how to invest their money in order to receive the highest or safest return. While they take the decision they usually factor in returns, the risk involved in making that decision but often leave out opportunity cost.

Opportunity Cost takes into consideration that you could miss out on a great opportunity in the future because you have committed your money to another investment. It makes it easier for us to prioritize one decision over others by putting numbers to these decisions. This results in a better data-driven method that prioritizes where our money is spent.

Opportunity cost can also be used within a company or by an individual when they decide where to raise money from. This could be through equity or through debt 

The following are some of the reasons why opportunity cost helps us take better decisions apart from what has been already discussed 

1. Helps us realize the cost of doing nothing.

Individuals at times are led to believe that there is no cost incurred when money is left idle. This leads them to simply keep money in a safe etc.

Opportunity cost takes into consideration the potential income the money could if invested in fixed deposits, bonds, mutual funds. This helps individuals take into account the difference their funds could make if they invest it in a financial instrument.

2. Helps take into account the cost of not disinvesting.

This often happens when an investor is too emotionally invested in a stock or has not adhered to an already set stop loss. In a situation where an investor remains locked in on a stock whose price continues to decrease he is risking not only the possibility of the stock plunging further but also the possibility of salvaging some return by investing in other safer instruments.

It is important to note that disinvestment is also an investment decision and opportunity cost helps quantify this decision by taking into consideration alternative investments.

3. Helps put into perspective the cost of not borrowing

Taking on debt is generally viewed in a negative light but this does not always have to be so. Take an example that a small company has the option to take advantage of diversifying into the new industry due to its profitability. Opportunity cost then helps the management put things into perspective if the investment can be financed and still come out profitable through debt. 

ALSO READ

5 Common Behavioral Biases That Every Investor Should Know

Closing Thoughts

Although Opportunity Cost provides the possibility of earning higher returns we should always remember that it involves looking forward into the future. This can be combated by first setting our investment objectives. Then opportunity cost could be used to help navigate the options that fit within the risk class of those objectives.

If we let our investment objectives be affected by opportunity cost then there is always going to be an investment opportunity that has the possibility of providing higher returns. The beauty of opportunity cost lies in the fact that it can be used by all. These could also be situations that are not financial.

What are NPA's And How do they affect Banks cover

What are NPA’s? And How do they affect Banks?

Understanding what are NPA’s or Non-Performing Assets: While evaluating banking sector companies, one of the key aspects that every investor needs to check is its NPA. In this article, we are going to discuss what are NPA’s, How NPA’s are categorized, How do these NPA’s affect the banks, and the reasons for high NPA’s in India. Let’s get started.

What are NPA’s?

Loans and advances that are given by the bank require the borrower to make payments in the form of installments that include the principal and interest amounts. At times the borrowers miss out on these installments, either due to lack of funds or at times willfully. When the principal or interest payments are missed and remain due for over 90 days the loans are classified as NPA’s.

Understanding what are NPA’s or Non-Performing Assets

Categorization of NPA’s

Banks then further classify these loans categorized as NPA’s on the basis of time i.e. on the length of non-payment of the loans. This further classification helps banks judge the possibility of recovering the loans with interest. Further classifications are done as follows 

1. Standard Assets

Standard Assets are loans that have remained as NPA’s for a period of 12 months or less. The risk associated with Standard Assets is low as the possibility of repayment still remains.

2. Sub-standard Assets

Sub Standard Assets are loans that have remained as NPA’s for a period of 12 months or less. Here the risk associated with the nonpayment of the loan is increased in comparison to Standard assets.

3. Doubtful Debts

Loans classified as NPA’s that are classified as NPA’s for a period exceeding 18 months are known as Doubtful Debts. The probability of loan recovery from these NPA’s is extremely low. Banks that have high NPA’s with the majority exceeding 18 months are affected with reduced liquidity.

In addition to this, the banks also suffer a loss to their reputation as the banks are held responsible to verify the creditworthiness of the borrowers before giving away loans. This shows poor management and poor judgment on the part of the banks.

4. Loss Assets

NPA’s that are identified by auditors to be non-collectible or recoverable is classified as NPA. At times banks look at the possibility of salvaging the collaterals placed but if that does not happen the loss assets dent the Balance Sheets. The Banks will have to further create provisions where a portion of the profits are transferred in order to writeoff the assets.

Gross vs. Net NPA’s

NPA’s are also classified as gross or net NPA’s. Gross NPA’s include both the principal and interest aspects of the loan classifies as NPA. Net NPA is arrived at when the principal amount is deducted by any payments received by the bank from the borrower with respect to the loan and also includes the amount the bank receives through its insurance claims or provisions set for the loan.

I.e Net NPA = Loan Amount – [Interest payments received + Insurance (DICGC & DCGC) + provisions made if any]

How do these NPA’s affect the banks?

A balance sheet that has a high percentage of NPA’s immediately impacts the banks’ cash flow and future earnings. Firstly if these NPA’s if paid on time would’ve generated added capital to the banks which, in turn, could be used to by the banks to extend further loans. In addition to the reduced ability to generate profits the bank also has to create provisions in order to set off the loss due to NPA’s. This provision will be sourced from the future profits of the bank which otherwise could have been used to maintain stable growth.

What do high NPA’s mean to other stakeholders?

The best example to assess the effect of NPA’s on stakeholders will be that of ‘Yes Bank’. The high NPA’s will have a significant impact on its customers where all withdrawals available to customers were capped at Rs. 50,000. This impacted many businesses as surviving on a cash flow simply would not even cover employee expenditures of the respective business. 

NPA’s are also an important aspect when it comes to investment decisions. High NPA’s are a red flag that the investments in that particular bank are not viable. The shares of Yes Bank suffered an 85% downfall after the news of their poor financials broke out.

Also read: The Unravelling of Yes Bank – Fiasco Explained

India’s position with regards to NPAIndia’s position with regards to NPA(Source: Moneycontrol)

Indias NPA’s stood at 9.1% as of March 2019. Although there was a decline from 14.7% in the previous years there was little to rejoice about. This is because according to data if a bank provides loans that it can be expected that they may not be repaid as high as 9% of the total loans given.

The NPA situation, however, has rarely improved in India. As of 2017, there were only 4 countries with worse NPA’s than India. These countries were infamously known as PIIGS in Europe due to their NPA’s. They included Portugal, Italy, Ireland, Greece, and Spain. It is noteworthy that Spain’s NPA stood lower than India at 5.28%.

What are the reasons for high NPA’s in India?

What are the reasons for high NPA’s in India?

(Source)

A) Economic: The Indian Economy enjoyed a boom phase from 2000-2008 where banks started lending extensively to companies in the hopes that the boom phase last where everyone benefits. However, the 2008 financial crisis hit the economy hard and gravely affected corporate profits.

This further affected the NPA’s during the recession. It was also around the period when the government banned mining projects affecting the infrastructure sector. Hence it can be observed that the majority of the NPA’s are formed by power, iron, steel, and construction companies.

B) Negligence and Corruption: The negligence of banks in assessing the creditworthiness is a major reason for increasing NPA’s. This is normally seen in cases where big corporates are involved. Then comes the problem of corruption when where loans are made available to corporates even when they have poor financials and credit ratings.

The best case study present here has been the case of Vijay Mallya. Loans were given to Kingfisher by BOI on Current Assets like office stationery, boarding pass printers, and folding chairs placed as collateral. 

Also read: Demystifying Vijay Mallya Scam

Bottomline

Current times also show instances why it is important to have good NPA’s. Banks that do are able to weather a financial crisis better. Indian banks that already suffer from poor NPA’s now face a struggle to survive the COVID-19 environment. Rating agency CARE has estimated that the Gross NPA’s of Indian banks are likely to rise to 9.6-9.9%, compared to the December quarter of last year where it stood at 9.3%. Experts, however, believe that they are to rise significantly more than that.

Due to the economic slowdown, one may expect banks to provide lesser loans at high rates as they may not see viable investments. But this is not what happens. In order to restart the economy, it is very important that the banks provide capital to ailing and new businesses. This has now put the banks in a pickle where they already suffer poor health and now they have had to go ahead and provide a moratorium on existing loan payments and added loans to help businesses survive.

Why Prices of Petrol and Diesel Increasing in India (2020)

Why Prices of Petrol and Diesel Increasing in India (2020)?

Demystifying increasing prices of Petrol and Diesel in India during Covid19 period: After 67 days of lockdown, the economy finally opened up on June 1st. Since then most of us have been trying to bring our lives together and adapt to the new normal of living with COVID-19. In the midst of threats on our borders and the steady rise of corona cases, petrol and diesel prices have steadily increased in the background for 22 days. These added to the unusual events of 2020, as the diesel prices were higher than petrol.

Today we shed light on the rising petrol and diesel prices. We also try and answer the possible reason for the increase especially when just a few days ago the crude oil prices crashed into the negative territory.

coronavirus petrol diesel price meme

How are petrol and diesel Priced?

Before we look into the causes for the price increase, it is best to figure out the chain that crude oil moves through in order to better understand where the price increase has come from.

How are petrol and diesel Priced?

(Source)

Unlike other oil-rich countries, 80% of the crude oil consumed in India is sourced from other countries. This crude oil faces freight charges until it is transported to Oil Marketing Companies (OMC) which is dominated by public sector enterprises with very few private players. These companies go on to refine the crude oil into finished products.  The public players include IOCL, HPCL, BPCL, MRPL, etc. The ONC companies then charge their cut of profits in addition to the cost incurred by them for refining. The next cut is taken as profits to the dealers in petrol pumps etc. It may be surprising but the portion of the charges mentioned above make up only one-third of the amount paid by the consumers for petrol or diesel. 

The remaining two-thirds portion is made up of the taxes paid to the government. These taxes are levied in the form of excise duty, VAT and Cess charges. The excise duties are charged by the central government whereas VAT and Cess charged on petroleum are charged by the state governments.

Every Rupee that the government increases in taxes on diesel and petrol leads to Rs.14,000 crore of additional revenue to the government per annum. This sheds light as to why the government would target the petrol and diesel prices. In the current scenario, the additional revenues likely to be generated come up to 1.4-1.7 lakh crore rupees.

Reasons for the increase in prices of Petrol and Diesel

— Crude oil price normalizing

One of the major questions we would be having is that since the prices had gone negative, how is it that we are facing an all-time biggest increase in a fortnight. It is important to note that there exist different types of crude oil varying based on the place they are sourced from and the sulfur content present in them. WTI from the US, Brent crude from the UK, and the OPEC basket from the middle east. Of these the most expensive has been the Brent and the OPEC.

Unfortunately for us, these are the ones that India imports. And further depressing news has been that it was WTI crude that went negative and not the Brent and OPEC. At their lowest points in April, the Brent and OPEC were priced at $16 to $20 per barrel.Crude oil price normalizing

(Source: Oilprice.com)

These prices have since then been doubled crossing $40. The Brent and OPEC crossing $40 in recent times have been one of the reasons for the price increase. But this is not a major factor as these prices simply haven’t even touched pre-COVID levels of 2019.

— Setting off losses

As seen above despite Brent and OPEC being comparatively expensive, their global prices had reduced significantly in the months of April-May. This further raises questions as to why the prices of petrol and diesel were not reduced to match the global fall. The answer to these questions lies in the fact that the govt had chosen not to transfer the benefits to the consumers but instead use it to set off other losses.

These losses were primarily because of the COVID-19 environment. It had forced the government to move into a lockdown freezing most of the revenue channels for the govt. Which also included income from petrol and diesel as the consumption was dropped to only 30%. 

Union petroleum minister - Dharmendra Pradhan

Union petroleum minister – Dharmendra Pradhan

In this case, the government decided not to reduce the prices to match the crude oil price. But instead, they chose to maintain price levels to make up for the fall in demand for petrol and diesel and also fall in revenue from other sectors. This carried on till the lockdown was lifted at which point the crude oil prices kept increasing globally. 

The fall in demand to only 30% of consumption also caused the OMCs to sell every liter at a loss as the profit made was not able to cover the cost incurred. The OMCs were forced to further increase their margins in the’ Lockdown-Unlock’ period to cover the losses they operated on during the lockdown which led to a 22-day steady increase till the prices touched levels where they were profitable.

— INR to Dollar exchange rate

The exchange rates also impact the prices of petrol and dollar as the crude oil is traded only in exchange for the dollar. The COVID-19 pandemic hammered the already weakened rupee. The rupee currently hovers at over Rs. 75 for a dollar. The rupee traded at Rs.70 for one dollar in December 2019.

Closing Thoughts

rahul gandhi petrol diesel price

The increase in the prices of petrol and diesel-only would kick off the inflation domino effect on other products as well. The Jet Fuel too has already begun to see its share of the inflation. And we already know that ATF being the major expenses for an airline company will further be transferred to the consumer fares. Other products too face inflation in prices as the cost of freight and transportation would increase too. The already ailing Automobile industry has already started to feel the burn as the Demand for diesel vehicles has already dampened.

Needless to say, the diesel and petrol price increase is not welcome considering the state of the economy where the people are already facing job losses, pay cuts, and fear public transport in COVID-19 times

Boycott China - Is it Actually Possible for India?

Boycott China – Is it Actually Possible for India?

A Study on being real about ‘Boycott China’: Last week, the internet has blown up with #BoycottChina trends. This comes after Sonam Wangchuk released a video calling all Indians to boycott Chinese products. This has been due to the aggression shown by the Chinese Army in the Indian territory. But India has not been alone to call for such boycotts in the recent past against China, other countries like the Philippines, Vietnam, and even separatist movements within China have started too.

My patriotic sentiments (which mean good) inspire me towards this call for a few minutes. But the reality where I type these words on a Chinese branded computer keeps me grounded. It goes without saying that none of us want to fund Chinese bullets that may be fired at Indian soldiers. Hence, today we have a deeper look at facts that may help clear this dilemma and also offer possible solutions.

 

Why boycotting China sounds right?

In the past, boycotting China has not only been called for because of Chinese military aggression towards its neighbors but also because of its human rights violations of its own citizens. Open firing at peaceful protestors in Tiananmen Square, the Chinese government has even been accused of illegally harvesting organs from Falun Gong (religious movement practitioner) and other political prisoners. This led to activists around the world calling for a boycott of Chinese products.

Sonam Wangchuk (whose role was popularly played by Amir Khan in 3 Idiots movie) has claimed that the aggression from China is only a means for the ruling communist party to divert the attention of the people away from its internal problems. 

A Trade where Chinese products and services are bought by Indian consumers to finance aggression by the Chinese troops not only on its own citizens but also towards Indian soldiers is as far as it gets from being fair.

Sonam Wangchuk released a video calling all Indians to boycott Chinese products

Have boycott movements been successful?

There have been various boycott movements throughout history. The US consumer forum tried to boycott French goods in 2003 in protest of France dissuading attacks on Iran. India too has had similar Boycott China movements in the past. #BoycottChina was trending in 2016 too after China supported Pakistan post the URI attacks.

A similar fact in all these boycott movements is that they have achieved nothing. After a few weeks, people lose interest or are caught up with the next most interesting issue. In other words, these movements eventually lose momentum. 

Another important factor why the Indian Boycott China movement does not follow up with greater action is economics. When a consumer goes to buy a product he would find that Chinese products are not only cheaper but also of superior quality in comparison to their Indian counterparts. In such a situation a choice made to purchase a product which is expensive and at the same time of inferior quality in comparison to the Chinese is only self-destructive.

Why an immediate boycott of China doesn’t make sense?

Trade Deficit occurs when the country’s imports are more than its exports. One of the major consequences of a large trade deficit is the weakening of one’s currency. This is precisely the case with India. In the years 2018-2019, the imports from China were at 70,319.64 Million. During the same period, the exports to China stood at 16,752.20 Million leading to a deficit of 53,567.44 Million.

But India is not the only country that has suffered this fate when dealing with China. Numerous countries around the world have faced this resulting in China becoming one of the countries with the largest trade surplus.

Why an immediate boycott of China doesn’t make sense?

(Countries with the highest trade surplus in 2018)

The trade deficit not only shows the dependence of Indian consumers but also of Indian industries on Chinese exports. Indian market leaders like Bajaj, TVS Motors, Mahindra, and Tata get their parts from China. Even pesticide and fertilizer companies based in India are overtly dependant on China. Take the example of United Phosphorous where over 55% of its products are sourced from China. 

China currently has an investment of 8 billion in the Indian markets. The year 2019 alone saw investments of $3.9 billion by Chinese firms in Indian startups. 

china betting on Indian startups

BigBasket, Byju’s, Delhivery, Dream11, Flipkart, Hike, Ola, Oyo, Paytm, Quickr, Snapdeal all these startups have secured funding from China. Even banks like HDFC have received investment from China. Although it may seem as if even though we are naming all renowned Indian companies it is apparent that there is no escaping China. 

Almost every company has links to China, through ownership or have raw material sourced from China to make finished products. From our food that we consume, means to travel, our access to technology all can somehow be webbed back to China.

Let’s talk about “Aathma Nirbhar”

The Prime Minister in his most recent address has pushed for an Aatma Nirbhar Bharat. Say due to this influence Indians strictly buy only Indian products. If we are to look at the 1947 -1991 environment where due to the protectionist views of the government the consumers were forced to buy only Indian. This led to the producers producing low-quality products.

This was because they were certain of receiving a market share irrespective of the quality. The 1947-91 period ended up doing more harm than good. The same period also saw the Chinese producers preparing their markets for global competition. This gave the Chinese a 40-year head start over their Indian competitors.

What would Adam Smith the father of modern economics say?

Adam Smith speaks about competitive advantage in his book the Wealth of Nations published in the year 1776. He takes the example of two countries England and Portugal and also of two products, wine, and cloth. Here, Portuguese are the best in producing wine and England in producing cloth. According to Adam Smith, Portugal should focus on creating wine instead of focussing on both wine and cloth. This would only lead to substandard products. England should focus on cloth and both countries should reduce the scarcity of cloth or wine respectively through trade.

Let us take the example of TVS Motors. They are known for producing good two-wheelers in the mid and low-priced segments. An attempt to produce the two-wheeler 100% in India would only result in more expensive vehicles of poorer quality. Hence TVS Motors taking materials manufactured in China that are of high quality and lower cost has resulted in them suiting the Indian markets today. We may be ready to purchase the more expensive Indian alternative if available in the future.

Our current situation

But if we are still are not convinced and before we decide conclusively let us take a moment and come out of our privileged shells. The recent pandemic has shed light on the poverty plights of our nation. The first relief package of Rs. 1.7 lakh crore aimed at feeding 800 million poor people. The increased price alternatives would only shove two-thirds of a section further down the wealth ladder. 

Also read: The 20 Lakh Crore Relief Package – Overview!

What about “Retaliation”?

So far we have considered retaliation only from our end. Boycott China and dumping Chinese products will definitely have a two-factor effect when done on a large scale. A similar retaliation from China will further the consequences on the Indian producers and companies.

Role of the Indian Government

Why doesn’t the Indian government simply put trade restrictions on Chinese goods? India being a member of WTO is required to abide by its rules. As per the WTO, countries are not allowed to discriminate amongst their trading partners.

When it comes to investments the government of India has allowed investors from neighboring countries to invest only up to 10% in an Indian company. Despite this Chinese companies have found loopholes to invest in the Indian markets. Chinese giant Alibaba gained a stake in Paytm by investing through its non-Chinese subsidiary ‘Alibaba Singapore Holdings Pvt Ltd’.

What’s the Solution?

From all the arguments made above, it becomes clear to us than an outright boycott of China is not possible. Boycotting China would only cause the Indian industries that have received funding or use Chinese materials more harm.

An alternative here is to look for products from other countries as and when the need arises to replace the Chinese products we have in our homes over time. A long term solution would be to steadily keep improving Indian quality. The best solution for the current issue which involves a standoff would be diplomatic talks. A war waged by consumers would only be self-destructive.

The Telecom War in India - Jio, Airtel, Vodafone cover

The Telecom War in India – Jio, Airtel, Vodafone?

Understanding the Telecom war in India and current Scenario: The Telecom industry in India has gone from being one of the most attractive to a cruel environment to all its players. The industry currently consists of three players i.e. Jio, Airtel, and Vodafone Idea. But if we look over the last two decades there have been over 16 players who have tried their hand in the industry.

We already know about the innate challenges the industry poses due to the ever-evolving technological environment. A newly arrived technological advancement may be completely obsolete in the next five years. But these are the challenges that a telco foresees and enters the industry with. Today, we’ll discuss the telecom war in India. Here, we’ll try to find out the key factors that have brought the industry to currently operate with barely three players and also look into the current telecom scenario.

telecom war in India

Telecom Industry – The Story So Far

In the pre-liberalization period, there existed only state-owned companies like BSNL. The operations of these companies can be dated back to the British era. Post the liberalization the government began issuing licenses to private players in exchange for a license fee.

This license fee set, however, was in accordance with The Telegraph Act of 1885 set to govern the state players. The private telcos found it hard to adhere to this and constantly defaulted on the fee payments.

Noticing this the government introduced the National Telecom Policy in 1999 where the telcos were given the option to either pay the existing license fee or share a percentage of their revenue which was called AGR ( Adjusted Gross Revenue)

— The More the Better

During this period the government believed that the greater the number of players the greater the benefits the consumers would receive. This has bought up to 16 players in the telecom industry. This, however, ended up doing much more harm to the industry due to the competitive pricing practices followed by the telcos to emerge as the top players.

Telcos kept entering the industry and vanishing from the industry at the same time. The majority of the players were acquired or forced to merge with the top players. The remaining players went bankrupt or had their licenses revoked.

telecom companies in india that went bankrout

(Source: Wikipedia)

— AGR Dispute

During this period the Department of Telecommunications (DoT) entered into legal disputed with the players. If must be noted that Revenue meant that any income received by the company irrespective of it making profits or losses. The companies agreed to pay AGR assuming that the revenues to be paid would be from the core(telecom related) activities of the industry. The DoT argued that a percentage of the revenue from all sources ( core and non-core) is to be paid.

This involved installation charges, value-added services, interest income, dividend, and even profit on the sale of assets, insurance claims, and forex gains. This meant that the telcos now owed 1.47 Lakh crore in AGR to the DoT. Other government entities like TRAI (Telecom Regulatory Authority of India) and TDSAT (Telecom Disputes Settlement and Appellate Tribunal) also voiced their concern over this claim.

AGR Dispute in India Telecom Industry

Both TRAI and TDSAT supported the telcos in this against the DoT. The TRAI even recommended excluding non-telecom revenues from the AGR but DoT challenged the TRAI recommendations. This led to a 14 year legal battle between the telcos and the DoT. The decision ultimately came in favor of the DoT on 24th October 2019. The courts ordered the telcos to pay  1.47 Lakh crore in AGR to the DoT. 

GAIL and PGCIL telecom Industry

Interestingly government entities like GAIL and PGCIL also had acquired a license from the DoT. The DoT also a government entity now claims that it is owed 1.72 Lakh Crore from GAIL. This is after computing its share from any revenue that GAIL made. The amount sought by the DoT is more than 3 times the net worth of GAIL.

— Enter Jio: A Mukesh Ambani Offering

These troubles in the telecom industry seem monumental and we have not even considered other factors like the 2G scam that took place. The worst, however, was yet to come for the telcos. In 2016, a new player Jio entered the industry. The predatory pricing strategy followed by Jio offered consumers 4G data for free. This further put tremendous stress on the telecom industry.

When Reliance Jio entered the markets in 2016 there were up to 7 telcos who had a substantial footing in the industry. By the end of 2019, there were only 3 other companies competing. Out of the three only Jio was profitable by extremely slim margins and airtel running but on losses. Vodafone and Idea too in losses were barely surviving the pricing onslaught. 

— Spectrum Dues

spectrum dues telecom

Apart from the AGR the telcos also owe the government dues from spectrum allocation auctions. The telecom industry makes the use of electromagnetic waves that are made available through a spectrum. Hence a spectrum is considered a national resource and allocated carefully by the government. The spectrum allocation charges are paid in installments to the government. With the telcos already in debt, they further started defaulting on these too.

Finance Minister Nirmala Sitharaman announced a moratorium on these installments for 2 years. But the moratorium provided by the government does not come interest-free as they will still have to pay additional interest accrued during the 2 year period. Airtel currently owes Rs. 11,476 crores on its installments with Vodafone Idea owing Rs. 23920 crores.

Telecom War in India: Current Scenario

All sympathies do not lie with the telcos. Prior to the Jio’s entrance, the telcos enjoyed a  period where they charged consumers exorbitantly. This was the main reason why Jio already had their stage set in 2016. Their offer of charge-free services to customers enabled them to immediately gobble up a section of the market share.

This was followed by the telecom war in India and competitive pricing which forced existing players like Airtel, Vodafone, and Idea to lower their prices and profit margins. 

How telcos are adapting to increased debt & 5G Preparation?

The telecom industry has forced its payers to adapt to raising funds from foreign investors in exchange for a stake in the company.

— Reliance Jio

After Reliance entered the telecom sector its debt shot up by 438%. Mukesh Ambani has set out to make Reliance a zero net debt company. This would mean wiping out 1.54 lakh crore of its debt. The following table shows the stakes sold and amount raised

Stake sold to% of Stake Sold Amount raised (Rs Cr)
Facebook9.9943,574
Sterling Silverlake1.155,655.75
KKR2.3211,637
General Analytics1.346,598
Vista Equity2.3211,637
Mubadala1.859,094
Total18.9788,195.75

Read More: Facebook- Jio Deal: What $5.7B investment means to Stakeholders?

— Airtel 

Airtel remains the only major player other than Jio which able to survive, compete, and raise capital with ease at this stage. It recently announced a 2.75% stake sale to raise 7500 crores ($1billion). In January, Airtel raised $15000 crores through qualified institutional placement and foreign currency convertible bonds for 7,500 crores ($1billion)

— Vodafone Idea

Vodafone and Idea have merged to form Vodafone Idea. This has enabled VodafoneIdea to become the top company in terms of subscribers. But this has only ensured their survival in the Indian markets. 

Vodafone Group CEO Nick Read has vowed to not invest in the Indian markets. This can be justified due to the court ruling against the telcos with regard to AGR.  This has made investing in India a lost cause for Vodafone as all incomes earned by the companies ill be used to pay back the existing AGR dues apart from the new AGR dues that will keep on accruing.

Also, their survival will require debt to finance 5G costs. This investment which does not generate any income in the foreseeable future will be hard to be explained to Vodafone shareholders in the UK. Vodafone Idea not only faces difficulty in raising investment but also struggles with its low 4G utilization. (Also read: Vodafone Idea has managed to attract attention from Google which eyes a 5% stake in the telco.)

In an advent, if one of the 3 players does not survive it would lead to the Indian markets turning into a duopoly. The two telcos that do survive may form cartels which will eventually result in a pricing agreement. This in addition to the AGR dues to the DoT and 5G spectrum will result in the consumers holding the burden through increased prices.

RankOperatorSubscribers (millions)Market ShareOwnership
1Jio382.8932.99%Jio Platforms
2Airtel329.0228.35%Bharti Airtel Limited
3Vodafone Idea325.5428.05%Vodafone Group (45.1%), Aditya Birla Group (26%), Axiata Group Berhad (8.17%), Private Equity (20.73%)
4BSNL123.1310.61%Government of India

(Table: Mobile Operators in India as of 29 February 2020 according to TRAI)

What the Government can do? 

To reduce the burden on the telecom industry the existing players have requested the Telecom Secretary to provide the 5G spectrum free of cost to existing players in an attempt to rescue the industry. The government can also ensure that cartels are not formed and players survive by benefitting the consumers.

This can be done by providing the 5G spectrums in exchange for the telcos agreeing to adhere to both floor pricing and price ceiling. By doing this the telecom industry will be provided some relief through 5G spectrum allocation as requested by telcos. The floor prices and price ceiling will ensure healthy competition and limit any adverse impacts on consumers.

Closing Thoughts

The story of the Indian Telecom Industry so far shows that the government is just inches away from slaughtering the golden duck in an attempt to increase its revenue. It is high time the Center interferes so that both the industry does not lean towards a duopoly or monopoly and at the same time the consumers do not face the brunt. Any efforts from the government to recover unreasonable amounts from AGR will push the telcos to increase debt borrowing from the banks.

This increased debt in addition to the cost of surviving by further investing in the 5G spectrum will force the burden towards the consumers. In an event of intense telecom war in India where a major player throws in the towel to quit, the already ailing banking sector will be further hit. Other stakeholders like the employees who earlier dependent on the telcos will further be added to the casualty lists.

9 Best Performing Industries During COVID-19 Storm

9 Best Performing Industries During COVID-19 Outbreak

A study of best-performing Industries during COVID-19 / Coronavirus storm: Even after COVID-19 changing soo much in our lives we still are faced with the question, “What is life going to be like from tomorrow?”. Covid-19 has the governments and other influential intellectuals scratching their heads due to the level of uncertainty it poses. Will the virus just disappear in a few months? Or Will a vaccine come in time? Or Will we just have to learn to live with it just like AIDS? This uncertainty has even made it hard to get a peek at what the future will be like let alone predict it.

Despite all this chaos, some businesses have still found a way to make lemonade out of lemons and keep striving. Today, we are going to cover a few of the best performing industries during COVID-19 outbreak. Here, we’ll have a look at which sectors and industries these companies come from and why they were able to do so.

best-performing Industries during COVID-19 / Coronavirus storm

Best Performing Industries During COVID-19

1. Pharma Industry

pharma industry best-performing Industries during Coronavirus times

Although the doctors and nurses battling the virus have had to face the risk of the virus, the pharmaceutical and healthcare industry, however, remains immune. This is because of our dependence on the pharma and healthcare at the frontlines against COVID-19. Due to changes in consumer behavior and hygiene practices any industry remotely connected has also benefitted. Disinfectants and sanitizers have recorded their highest prices and sales.  

2. Information Technology (IT) Industry 

The IT sector is in a relatively good position in the midst of the pandemic in comparison to others. This can be owed to the fact that a stable internet connection and laptop are all that is required in most of the cases, enabling them to work at ease from home. The Work From Home(WFH) approach adopted by most commodities has given rise to apps like Zoom.

most downloaded apps during coranavirus times

Zoom has seen a 187% increase in its share prices since December. Other software companies that provide solutions for WFH have also seen a similar response. The inherent privacy concerns in WFH have also increased the demand for cybersecurity.

The current scenario will also see an increased push for technological acceleration. The Indian IT sector is majorly reliant on the US and European markets. Hence the impact it receives will also be dependent on the impact on the US and European markets.

3. Telecommunication Industry

The telecommunication industry may have been impacted in its day to day functioning but its market demand has increased. This is because of the increasing need to connect during lockdowns has led to an increase in the data used.

4. E-commerce Sector

ecommerce booming during coronavirus times

Many countries have found lockdowns the only option to buy some time as they try to grasp the changes. This has been a silver lining for the E-commerce segment as many consumers have turned to them for their needs. This also involves E-Retail shops that deal in fast foods like BigBasket and Grofers.

Also read: Amazon has the right businesses to weather coronavirus.

5. Fast Moving Consumer Goods (FMCG)

The FMCG sector had seen reduced demand for the initial few weeks during the lockdown but these will return to normal during the easing period. The FMCG sector, however, will benefit from the reduced crude oil prices. This has come in two forms. Firstly the benefit if one of the components is crude oil or if crude oil is part of the manufacturing process. Secondly from the reduced cost of packaging which requires crude oil in its production. Packaging currently makes 15-20% of the cost.

6. Paint Industry

Companies in the painting industry will be benefitted from the reduced crude oil prices. This is because 45% of the raw material of these companies are crude oil derived. A few of the leading companies in the paint industry are Asian paints, Kansai Nerolac, Berger paints, etc.

Also read: How Crude Oil Prices Impact Indian Market & Economy?

7. BFSI Sector

Banking, Financial Services, and Insurance companies also have an opportunity to increase their demand post the lockdown. This is because the reduced rates will result in cheaper loans. In addition to this, the government has encouraged loans to the MSME sector by acting as the guarantor in many cases.

Insurance companies will also see an increase in their product sales. This is if they are tweaked to match the Covid-19 environment once the government stops playing a major role. Companies like Paytm which are an eCommerce payment service and in the fintech business have continued their growth from demonetization into the great lockdown. This is also because of the nature of the virus and people’s increasing aversion towards cash.

8. Online Streaming, Gaming and EduTech

sectors performing well during coronavirus

With all forms of existing entertainment shut down, increased demand has been seen in online streaming websites and gaming companies. Netflix and Youtube have had to reduce the streaming quality in Europe to ease the pressure on the internet.

gaming industry boom post coronavirus lockdown

Gaming companies will have a good run during with issues being faced in its console production which will be fixed once the economy opens up.

The online education market in India was already forecasted to grow to become an $18 billion market by 2022. The great lockdown has only given a boost as numbers will be met much sooner.

9. Home Fitness

home fitness industry rise post coronavirus

The nature of the virus has made accessing Gyms and other public areas to maintain fitness dangerous. Companies like Peleton which offer an interactive experience along with their equipment have seen a rise in their share price this year.

Post Corona Environment

The post-Corona environment will be rigged against industries that have been affected during the lockdown. This is due to the changes in behavioral patterns. A level laying field can only be expected after a year or two after the pandemic. Be it a business or a human, sticking to old behavior patterns and not adapting to suit the environment will get you killed!

How Crude Oil Prices Impact Indian Market & Economy cover

How Crude Oil Prices Impact Indian Market & Economy?

Understanding how crude oil prices impact Indian market & Indian economy:  The Liquid Gold, as the name goes, is the most important factor in understanding Global economic health. We have seen a 150% fall in the prices of WTI crude oil over a period of the last four months (Feb-May 2020) and a bounce-back of nearly 75%. Therefore, this year has been a year of massive swings in the prices of crude oil.

The price at the beginning of the year was above $60 per barrel and we saw the price of negative (-) $30 per barrel on around 20th April 2020. Hence, in all practical sense, one was paid to buy a barrel of oil. The current price of WTI crude is $35.46 per barrel (1st June 2020). This has caused a crisis in OPEC nations and other countries like Russia, which are dependent on oil exports.

The current price of WTI crude is $35.46 per barrel (1st June 2020)
(Source: www.Bloomberg.com)

How Crude Oil Prices Impact Indian Market?

Let us now understand how crude oil prices impact Indian market and its effect on different segments of the economy like current account balance, fiscal deficit, stock market, and more.

1. Impact on Current Account Balance

India imports nearly 84% of its domestic demand and it is one of the largest importers of oil in the world. Indian Oil imports account for nearly 27% of its total imports. Therefore, a fall in the prices of oil will reduce the cost of importing oil from other countries. And this in turn has a direct impact on the current account deficit (the amount that India owes in foreign currency).

Therefore, in the current crisis time (COVID-19 pandemic and economic slowdown), reduced crude oil prices have been a blessing in disguise to the Indian economy. In general, a 5 % increase in oil prices will impact the trade deficit by nearly $4 billion.

2. Impact on Fiscal Deficit

The price of the oil is fixed by the government and it is at a subsidized rate. And then the government compensates the companies for selling the oil at lower prices. These losses are also called under-recoveries. Therefore, the losses incurred because of compensating the companies losses, adds to the Fiscal deficit of India. But with the reduced oil prices, the compensation to be paid to these companies also reduces and which in turn helps in narrowing the fiscal deficit.

3. Impact on Stock Market

Now, if research and history are to be believed, then there is an inverse relationship between the oil price and the Indian equity market. This is because the Indian oil industry is majorly an importer of oil. Therefore, industries like tyre, lubricants, logistics, refinery, airlines, paints, etc are directly affected by a change in oil prices.

Further, as we are aware, energy stocks have nearly 12.5% weightage in Nifty 50 and nearly 15% weightage in Sensex. So, strength in crude oil prices adversely affects these oil-dependent industries and weakness in oil prices, usually signals strength in these companies’ stock prices. If we were to take an example of the paint industry, companies like Asian paints, Kansai Nerolac, etc use oil as a major ingredient in their paint. So, any movement in oil prices directly impacts their performance in the stock market.

Crude Oil Prices Impact on energy index

(Fig: Nifty Energy Index – 10 Yrs Chart)

Crude Oil Prices Impact on energy index (Fig: Crude Oil WTI Futures – 10 Yrs Chart)

Now, if we were to look at the two charts above. The one on the top shows the line graph of the Nifty Energy index for the last ten years and the one at the bottom shows the performance of WTI crude over the period of the last ten years.

At first glance, it may be very clear that there is an evident negative correlation between the performance of two. During 2011-12, when oil was trading near its peak of $140 per barrel, the Nifty energy index was trading near its low. And, when the Nifty energy index was nearing its peaking in early 2019, the per-barrel cost of crude oil was hovering around $55.

Now, we all must be wondering, that our equity market should have really outperformed when the oil prices crashed to sub-zero levels. But the global pandemic (COVID-19) has slowed down all global economies and we are no exception to it.

4. Impact on Exchange Rate

Rupee, being a free currency (value of rupee depends on the demand in the currency market), its value depends on the current account deficit. Therefore, if the oil prices are high, then the country will have to sell rupees and buy dollars to pay for oil bills. Similarly, if the price of the oil is low, then the current account deficit is low and the amount of dollars required to pay for oil bills are also low.

5. Impact on Inflation

India, being a vast country, the goods need to be transported from one place to another. And oil is a very important catalyst in the movement of vehicles from one place to another. A rise in oil prices leads to a direct increase in the price of goods and services. And it has a direct bearing on the prices of petrol and diesel. And hence it contributes to the rise in inflation in the country.

Therefore, a reduced price of oil comes as a boon to the economy of India. Reports published by Moneycontrol.com and State Bank of India(SBI) suggest that a $10 change in the oil price, impacts inflation by 0.3%.

Closing Thoughts

In conclusion, we can say that weak or reduced oil prices have a major positive impact on the Indian economy. India being an importer of crude oil, so higher oil prices imply, more payment needs to be made in foreign currency. And oil prices have a major say in the financial markets of our country. A weak oil price usually signals strength in the performance of the stock market. And a strong oil price has a negative impact on the performance of the stock market.

And similarly, if we were to take the example of oil-exporting nations, strong oil prices have a very positive effect on their incomes, balance of payments, and their financial markets.

What are Corporate Spin-Offs meaning

What are Corporate Spin-Offs? Meaning, Pros & Cons!

Understanding corporate Spin-Offs and how they work: There are many corporate actions that act as a catalyst in the market and results in the prices of a share changing drastically within a short frame of time. A few common examples of such catalysts are mergers, acquisitions, bonus shares, buybacks, etc. The announcement of all these events results in rapidly increasing (and sometimes decreasing) of share prices in a short period. Therefore, share market investors and participants need to know what exactly these catalysts mean.  One other typical example of such events are corporate spin-offs. 

In this post, we are going to understand what are corporate spin-offs, how they work, their advantages, disadvantages and why does a company opt for spin-off. Let’s get started.

What are Corporate Spin-Offs?

A corporate spinoff is an operational strategy where an existing division of the parent company is dissolved and a new company is created in place of the division which is now independent of the parent company. Ownership in the newly formed independent company is given to the shareholders of the parent company on pro-rata based on the holdings in the parent company.

The new company resulting from this corporate action is known as the company spun-off. The company spun-off acquires its assets, employees, and other resources from the parent company.

corporate spin off

A spin-off is a mandatory corporate action. In a mandatory corporate action, the board takes the decision and the shareholders are not permitted to vote.

To make the topic more comprehensible we shall be referring to the division of the company that is spun off and becomes independent as  ‘Spinoff Ltd’. The portion of the company that remains with the existing company earlier will be referred to as ‘Parent Ltd’. The shares of the newly created Spinoff Ltd are distributed to the existing shareholders of Parent Ltd in the form of a stock dividend.

Why does a company opt for Spin-off?

There are a number of reasons why a company may opt for a spin-off. Here are the top grounds why a company may go for a spin-off:

1. Benefits of Focus

Companies that go for a spinoff generally have divisions that are least synergetic and have distinct core competencies from that of the Parent Ltd They find turning these divisions into independent companies i.e. into Spinoff Ltd would be most appropriate.

A spin-off would enable both the Parent Ltd and the Spinoff Ltd to sharpen focus on its resources and manage themselves better off independently. 

Spinoff Ltd benefits from the spin-off the most because they get a new management that is focussed only on the goals of Spinoff Ltd. The newly assigned leaders present here would be experts in the field with focus only on the goals of the Spinoff Ltd. This would also help Spinoff Ltd override corporate bureaucracy that was impeding its growth in Parent Ltd.  

2. Due to Failure to sell a division

At times Parent Ltd might have decided to sell off one of its divisions but does so unsuccessfully. In such cases, the company uses spin-off as a last resort to separate itself from the division.

3. Reduced agency costs 

At times the parent company may enter sectors that are soo diverse from its core competencies that its investors may show no interest in the new division or may even oppose the new division. In these cases, the company incurs agency costs while resolving disagreements between the management and the shareholders.

If the new division is the cause of disagreement a spin-off will prove beneficial to Parent Ltd.

This will also result in satisfied shareholders.

4. Risk, Profitability, and Debt

If a division of a company increases its overall risk due to the sector it operates in the board may take a decision to spin-off that division. 

A division may also have all the characteristics of growth in the future but its current performance or losses may be affecting the parent company. In such a situation the division may be spun off.

 When a Spinoff Ltd is created it may take on the debt of the Parent Ltd. Or at times Parent Ltd. may give Spinoff Ltd a fresh start by not transferring any debt. This will depend on the strategic perspective of the board.

5. Reduced Overheads 

Parent Ltd will benefit from the reduced overheads that pertain to the division which now becomes Spinoff Ltd. On the other hand, Spinoff Ltd will enjoy the freedom of taking care of its own overheads as required without any interference.

parent company and spinoff company

Although there are a number of reasons why a company may opt for a spin-off it is basically due to the fact that it feels that by doing so it would turn out to be beneficial to both Parent Ltd and Spinoff Ltd if they operated independently.

What is the Spin-off Process?

A spin-off may take anywhere from half a year up to over 2 years or even more to be executed. Once the board takes the decision there are multiple steps that follow. They include identifying well-suited leaders for Spinoff Ltd. Creating an operating model and financial plans to suit the business of Spinoff Ltd.

This is because the parent company is still responsible for its division. Proper communication about the terms of the spin-off to the shareholders is also necessary. This is followed by completing the legal requirements. The parent company also focuses and helps Spinoff Ltd to create a new distinct identity before the spin-off.

Types of Corporate Spin-offs

Here we classify spinoff on the basis of the ownership retained by the parent company.

– No ownership retained

In what is called a pure spin-off the parent company does not retain any ownership in Spinoff Ltd. 100% of the ownership in Spinoff Ltd is distributed among the existing shareholders of the company. Here Spinoff Ltd gets greater autonomy in its operations once the spin-off is complete.

– Minority Ownership Retained

Parent Ltd is also allowed to hold up to 20% of Spinoff Ltd. In such a case say if 20% is retained by Parent Ltd, the remaining 80% is distributed among the shareholders on a pro-rata basis. Here the parent company enjoys a greater focus on is operations and still retains some influence and decision making ability in the company spun-off. 

There is also a possibility of a partial spin-off where the company may only spin-off a part of its division and retain minority or not retain ownership accordingly.

Effects of spin-off on price of securities of the company involved

Once a spin-off takes place the share prices of Parent Ltd will fall. This is because a spin-off involves the transfer of assets from Parent Ltd to Spinoff Ltd. This will result in reduced book value of Parent Ltd and hence its reduced price. However, the reduction in price is set-off by the share price of Spinoff Ltd. This is because Spinoff Ltd will receive the same assets transferred from Parent Ltd. Hence the investor will not face any immediate loss of value.

For eg. say the market cap of the company before the spin-off stands at Rs.10 crores and its current share price is Rs.100. Say the assets that will be transferred to Spinoff Ltd are worth Rs.2 crores. After the spin-off, the market cap of Parent Ltd will be worth 8 crores resulting in a post spinoff share price of Rs.80. The share price of Spinoff Ltd would be Rs.20 with a current market cap of Rs.2 crores.

Reduced demand from Funds

These prices will remain temporarily as the shares will be subject to market volatility. Spin-offs are said to cause sell-offs, particularly in the index-based funds. This is because an index shows the topmost companies in a market based on their market cap. The companies undergoing spin-off may no longer suit the requirements of the market index.

Parent Ltd too may lose its position among the top stocks due to the reduced market cap after the spin-off. This will cause funds that follow the indexes to sell the shares of Parent Ltd as well. Other funds may too sell the shares of Spinoff Ltd. This is because Spinoff Ltd may not suit their capital requirements, dividend requirements, etc. This will result in a reduced demand and fall in the price.

Also read: 11 Must-Know Catalysts That Can Move The Share Price

Disadvantages of Corporate Spin-Offs

1. Increased cost

The cost of the spin-off will have to be borne by Parent Ltd. They will include legal duties and other costs of set-up.

2. Employee’s Discomfort

The employees in the division being spun may have joined the Parent Ltd owing to its reputation. They may be put in a situation where they will lose that identity and at the same time be confronted by the uncertainty of Spinoff Ltd.

Spin-offs as part of an Investing Strategy

The share price of Parent Ltd gets reduced after the spin-off. But this is made up for by the shares of Spinoff Ltd that the existing shareholders receive as a stock dividend. As discussed earlier due to market reactions the price may further fall.

After a spin-off takes place investors have the option to either hold onto both the shares of Parent Ltd and the shares of Spinoff Ltd. Or they have the option to sell both or either one. But before deciding which is better let us have a look at what historical studies have shown us about a spin-off.

Spin-offs as part of an Investing Strategy

— Parent company shares   

According to a study by Patrick Cusatis, James Miles, and J. Randall Woolridge published in 1993 issue of The Journal of Financial Economics, it was observed that the parent companies beat the S&P 500 Index by 18% during the first 3 years. A study by JPMorgan showed the parent companies beating the market returns by 5% during the first 18 months.

A more recent study by the Lehman Brothers investigated by Chip Dickson between 2000 and 2005 showed that parent companies beat the market average by 40% during the first two years. Due to their strong market cap, holding onto shares of Parent Ltd will be well suited for those investors that look for stable and low-risk returns. This is because as we will observe ahead, the returns from Spinoff Ltd are higher in comparison. But the shares of Parent Ltd are observed to perform even in times of market downturn.

— Shares of the company spun off

According to the same study published in the 1993 issue of The Journal of Financial Economics, it was observed that the companies spun-off beat the S&P 500 Index by 30% during the first 3 years. The study by JPMorgan showed the companies spun-off beating the market returns by 20% during the first 18 months. The study by Lehman Brothers, investigated by Chip Dickson between 2000 and 2005 showed that parent companies beat the market average by 45% during the first two years. 

All the studies show that the shares of Spinoff Ltd would not only beat the market but also would perform better than the shares of the Parent Ltd. It, however, should be noted that the share price of the spun-off companies is highly subjective to market volatility. They outperform in strong markets and underperform in weak markets. Hence they are much more suited for individuals with risk appetite.

Investors should also note that it is not the case that all spin-offs are successful. There have been situations where spinoffs have performed negatively. The best way to assess future performance is for the investor to find out why the company is attempting to have the division undergo spin-off. This is to assess if the company is using the corporate action to simply get rid of its debt or if the company is getting rid of a division in which they do not see much future prospect. In such situations, a study of debts and losses pertaining to the division in the companies books will help.

The Rs 20 Lakh Crore Relief Package - Overview of First Tranche Aatma Nirbhar Bharat Abhiyan

The 20 Lakh Crore Relief Package – Overview of “First Tranche”

A detailed study on the 20 Lakh Crore Relief Package in India (First Tranche): Prime Minister Narendra Modi’s address to the nation on Tuesday will be remembered by many for a right smart spell due to two reasons. Firstly because the number we couldn’t fathom  – 20 Lac Crore (20000000000000- 10% of our GDP) is now our relief package. Secondly for the word ‘Aatma Nirbhar’ (Self Reliance).

However, if observed the address holds much more gravity, especially in our preparation for the post lockdown economy. The direction chosen to move in is towards an Aatma Nirbhar Bharat.  To achieve this the Abhiyan has focused on the five important pillars- the economy, infrastructure, system, vibrant demography, and demand. It seems like a throwback to the 20th century Swadeshi movement with national leaders calling for local purchases. It is however evident that the economy can be saved from being plundered by COVID-19 by robust demand for Indian products.

narendra modi ‘ Aatma Nirbhar’( Self Reliance) announcement

Finance Minister (FinMin) Nirmala Sitharaman announced on Wednesday the First Tranche of measures that would be taken to attempt at reviving the economy. The focus would be on the factors of production. However, the traditional factors have been recast to suit the purpose of this Abhiyan. They are:

  1. Ease of doing business
  2. Compliance and Regulation
  3. Due Diligence Observed

The FinMin also clarified that becoming ‘Aatma Nirbhar’ would not mean turning into an isolationist state that only looks inward. But instead, it talks about a country that can rest on its strengths and at the same time contribute to the globe. Today we have a closer look at the measures of the first tranche, the reasons for their implementation, and the path intended.

Measures to revive the economy -Tranche1 

Nirmala Sitharaman announced the fifteen measures to revive the economy. They are directed towards the following sectors/measures:

MSME (Micro Small Medium Enterprises)

The FinMin has focussed a considerable portion of the relief towards Micro Small and Medium Enterprises( MSME). Of the 15 key decisions, 6 are directed towards the MSME. MSMEs are our nation’s dominant job creator by employing 11 crore people.

MSMEs contribute to 45% of the country’s manufacturing output, 40% of exports, and to 30% of the GDP. Considering the figures a relief package not directed towards the MSMEs survival would result in their closure and eventually mass unemployment accelerating the GDP decline. From the numbers above it becomes evident that ensuring their survival would mean saving the economy.

MSME (Micro Small Medium Enterprises)

It can be noticed from above that there is a huge gap between credit requirements and credit available to MSMEs. Such a huge lending ability to bridge the gap is only possessed by financial corporations in the country. The government would not be able to fulfill the requirements simply because it does not have that much money to be directed towards MSMEs during an ongoing pandemic.

What are the means adopted to achieve this?

The government has two options here. Either directly give loans to the MSMEs or to take over the credit risk of the loans received by MSMEs from other sources. It becomes evident that the government has chosen the latter as the measures in Tranch 1 focus on this.

If in a normal situation if an MSME would approach banks he would be required to place a collateral of a value higher than the loan in exchange. The property available with MSMEs will be affected too as the outbreak has caused a fall in their prices as well.  The Government of India(GOI) has rolled out measures where instead of collateral it acts as the guarantor for the loan. This means that in a case where the MSMEs fail to repay, the banks would still be able to recover the loan from the government. With the government acting as a guarantor the banks are encouraged to give out more loans to the MSME’s

The reforms that enabled this are:

1. Three Lakh Crore collateral-free automatic loans for MSMEs

Here MSMEs that have no more than 25 crores outstanding in loans and a turnover of at least Rs. 100 crores are eligible. An emergency credit line to businesses and MSMEs has been set up from NBFCs and banks for up to 20% of the outstanding credit as of 29/02/20.

The loans will be provided with a 4-year tenure with no requirement for the principal to be paid for the next 12 months. They will be required to pay interest however but at a capped limit set by the GOI. Here the GOI will act as 100% guarantor for both loans and interest. This scheme can be availed till 31st October 2020. 

The Finance Ministry has estimated that this will help 45 Lakh business units to resume business utility and safeguard jobs.

2. Rs 20,000 crores subordinated debt for stressed MSMEs

Here the GOI will facilitate a provision for Rs. 20,000 crore as subordinate debt. This is aimed at MSMEs that are stressed and would be considered NPA (Non-Performing Assets) but still have managed to keep functioning. These MSMEs classified as NPAs would not be provided credit by NBFCs or banks. Here the promoter of the MSME will be given debt by the banks which will then be infused by promoters as equity in the firm. This will increase his respective ownership but will be liable for the debt received.

3. Rs. 50,000 crore, equity infusion for MSMEs through FOF.

The GOI here will set up a Fund of Fund which in turn will invest in its daughter funds. These daughter funds will provide equity funding to MSMEs that show growth potential. The GOI will invest 10,000 crores into the FOF. The remaining amount will be funded from institutions like LIC and SBI.

Rs. 50,000 crore, equity infusion for MSMEs through FOF

The MSME, however, will be encouraged to get listed on the main board of the stock exchange.

4. New Definition of MSMEs.

The FinMin pointed out before the announcement that this change of definition will be in favor of MSMEs. The new definition will revise investment slabs for those companies to be considered as Micro Small and Medium. In addition to the investment, it will also consider the turnover before classifying an MSME.

The new definition will also have no distinction between the MSME involved in manufacturing and service.

New Definition of MSMEs

  • Micro will be those with investment up to 1 crore whose turnover is LESS than 5 crores.
  • Small will be with investment up to 10 crores whose turnover is LESS than 50 crores.
  • Medium will be those with investment up to 20 crores and a turnover of  LESS than 100 crores

5. For government procurement tenders up to 200 crores will no longer be on the global tender route.

According to this global tenders that are worth up to 200 crores will no longer be available to global players.

This reform would encourage and provide MSMEs with the opportunity to procure these tenders without facing global competition. 

6. Other incentives for MSMEs 

MSMEs in the post lockdown environment will face problems of marketing and liquidity due to social distancing requirements. For these reasons, the GOI will launch an e-market linkage for MSMEs which will be promoted as a replacement for trade fairs and exhibitions. Fintech also will be applied to enhance transaction-based lending using data generated by e-market linkage.

In addition to this, all dues from the GOI and Central Public Sector Enterprises (CPSE) will be released in 45 days. 

This reform focusses on ensuring that the MSMEs are able to restart their business with ease after the lockdown as well. At the same time, their liquidity position would be improved to meet their immediate needs from the dues received.

Provident Fund Contribution

Provident Fund Contribution announcement by sitharaman

7. Reduction in rates for those covered in the first relief package.

Under the Pradhan Mantri Garib Kalyan package of Rs 1.7 lakh crores announced in the first phase of the lockdown, the GOI announced that it would contribute the employer’s portion to the PF. The companies eligible for this relief were those who had 100 employees earning less than 15000 per month. This relief was announced for a period of 3 months.

Moreover, this relief currently helps a total of 6 Lakh establishments during the months of March, April, and May. The FinMin announced that these establishments that are currently eligible would have these benefits extended to both the employees and the employer’s contributions respectively. The GOI will now pay 24% to the PF for a period of 3 months.

8. Reduction in rates for those not covered in the first relief package.

The FinMin also announced that those who were not covered earlier would now only be required to contribute 10% instead of the earlier 12% rate. This 10% contribution will be for both the employers and the employees for the next 3 months.

However, for state PSU and CPSE, the employer’s contribution will remain at 12% but the employees will be required to contribute only 10%.

The main aim of the PF contribution from the govt or rate reduction is to transfer more money into the hands of the employers and employees. The employers would have greater liquidity and hence would be able to use this to better survive. The employees, on the other hand, would have more cash in their hand which would cause a spurt in the demand in the economy. This will create liquidity of 6750 crores available to the employers and employees for the next 3 months.

NBFC( Non- Banking Finance Corporations) / HFC(Housing Finance  Corporation)/ MFI(Micro Finance Institutions

9. 30,000 crore special liquidity scheme for NBFC/ HFC/ MFI

The scheme is available to those NBFC’s that are finding it difficult to raise debt in the COVID-19 environment. The special liquidity scheme of 30,000 crores was launched for this. Under the scheme, investment was made by buying investment-grade debt papers of NBFC HFC and MFIs. It is not necessary for the companies to be graded highly and be of high quality.

Purchasers of these debt papers will receive a guarantee from the GOI.

10. Rs. 45,000 crore Partial-Credit Guarantee Scheme(PCGS) 2.0 for NBFC’s.

With the PCGS already in place, the PCGS scheme is said to supplement it. This scheme will enable finance corporations that have low credit ratings to raise finances. In PCGS 2.0 the existing PCGS scheme will now be extended to cover borrowings such as primary issuance of bonds and commercial papers of these entities. Here ‘AA’ papers and below including unrated papers will also be eligible for investment. This will particularly benefit MFI that do not have ratings high enough to attract investments.

In this scheme, the first 20% of the loss will be borne by the guarantor i.e. GOI.

The main aim of both schemes is to provide liquidity to NBFC’s, MFI, and HFC. If they are provided with the liquidity it will lead to increased lending to MSMEs. So it can be said that even these 2 schemes are aimed at the MSMEs.

Discoms

Discoms

11. 90,000 crore liquidity injections of Discoms.

The working of the electricity sector requires Power Generation Companies(Gencos) to transfer electricity to Distribution Companie(Discoms) in respective states which is then transferred to the consumers and respectively paid for. The payments then trickle down to the Gencos. The Discoms currently owe Rs 94,000 crores to the Gencos. The lockdown unfortunately only alleviated the problems and troubles of the electricity sector as many industries were shut causing a fall in the demand. In the electricity sector, the units produced cannot be stored. Hence a fall in the demand causes a loss.

The FinMin unveiled that both PFC and REC will together infuse a total of 90,000 crores into all the Discoms against all the receivables they have. These 90,000 crores in loans will be extended against the state government guarantees with the exclusive purpose of discharging liabilities of Discoms and Gencos.

The loans, however, will be given to the Discoms for specific activities and reforms which include 

  • Introducing digital payment facility by Discoms where necessary. 
  • Liquidation of outstanding dues to state govt.
  • Plan to reduce financial and operational losses.

The benefits of this have also been aimed at being passed onto the consumers in the form of rebates for the power tariffs paid.

Infrastructure

12. Relief to contractors 

Central Agencies ( like Railways, Ministry of Road Transport and Highway, Central Public Works Department) have been directed to extend all contracts for up to 6 months. This covers both construction works and goods and service contracts. It covers obligations like completion of work, intermediate milestones, and extension of the concession period in PPP(Public-Private Partnerships) contracts. 

To ease cash flows the GOI will partially release bank guarantees, to the extent contracts are partially completed. This move will also improve the cash flows for the contractors as they will be provided with liquidity which will help them meet immediate business needs when the lockdown is lifted. 

TCS Chief Strategist Himanshu Chaturvedi said ‘ The Governments Aatma Nirbhar Bharat Initiative has recognized infrastructure as one of the 5 pillars. This is an acknowledgment of the sector’s role in India’s development and large scale employment generation.

13. Relief to Real Estate 

According to this measure, the real estate is to treat COVID-19 as a ‘force majeure'(unforeseeable circumstances that prevent someone from fulfilling a contract) and extend registration and completion date by 6 months. The regulatory authorities may extend this for another period of 3 months if necessary. This was done so that the home buyers may get new timelines for delivery.

The GOI has also decided to provide projects that have been stalled due to a lack of funds with financial support. Projects that are NPA’s or undergoing NCLT will also be eligible for the proceedings. The maximum finance for a single project has been capped at 400 crores.

This scheme is said to benefit 1509 housing projects comprising of 4.58 Lac housing units.

TDS and TCS

14. Reduction of rates

In order to provide more funds at the disposal of the taxpayer the rates of TDS for non-salaried specified payments made to residents and rates of the tax collected at source for the specified receipts shall be reduced by 25% of the existing rates. 

This will be applicable for the rest of the year starting from 14/05/2020 to 31/03/21. These measures are estimated to release liquidity of Rs. 50,000 crore.

It has to be noted that this doesn’t bring down the tax liability of taxpayers, it leaves more money with them during the course of the FY. Individuals will still have to pay their tax liability every quarter or annually.

15. Other Measures

All pending refunds to charitable trusts, non-corporate business, from the GOI shall be issued immediately.

Income tax returns extended from 31st July 2020 and 31st October to 30th November 2020. The tax audit has been postponed from 30th September 2020 to 31st October 2020. 

Closing Thoughts

The 20 Lakh Crore Relief Package

Ernst and Young Chief policy advisor D.K. Srivastava estimated that the measures announced on Wednesday amounted to Rs 5.94 lac crore, which includes both the liquidity financing measures and credit guarantees, although the direct fiscal cost to the govt. In the current financial year may only be Rs 16500 crore. As mentioned earlier the government has taken over the credit risk that the MSMEs and various financial institutions.

Hence the amount that the government would invest will depend on how much of the loans taken by the MSMEs and various financial institutions will default on. Furthermore, the real trajectory of the relief package can only be understood after it is viewed together with the measures in the Second and Third Tranch. Even more so on how many of these are successfully implemented. It still goes without saying that tranch 1 is nothing short of impressive.

What is Blue Ocean Strategy Examples Pros Cons

What is Blue Ocean Strategy? Examples, Pros & Cons!

Understanding Blue Ocean Strategy with Examples, Pros, Cons & More:  Hello readers! It is a new day and we are back with a new topic of discussion exclusively for you all!

Almost all of us have been to beaches for a weekend getaway or long vacations! If not holidays, we have definitely come across visuals of oceans and seas on social media and televisions. Haven’t we? Well, oceans are vast, deep, massive, wide and are the most baffling natural wonders of the world. Proper explorations and researches can give way to incredible discoveries and provide us information about its scopes and untapped prospects.

In a similar fashion, a path-breaking strategy, known as Blue Ocean Strategy, was introduced by  W. Chan Kim and Renée Mauborgne. It is a pacifist marketing scheme and is considered a strategic planning tool for assessing a business.

A Blue Ocean Analogy is utilized to unlock the wider, unfathomable, powerful and vast potential in the unexplored market space in terms of profitable growth. This strategic planning theory is an escape from the general notion of benchmarking the competition and focusing on lump sum figures.

What exactly is a Blue Ocean Strategy?

Blue Ocean Strategy is all about devising and acquiring the uncontested market forum by spawning a new demand.

Since the industries are in a state of non-existence, there is absolutely no relevance of peer comparison. The strategy bags the new demand by familiarizing unique products with advanced features that stand apart from the crowd.

In other words, the strategy spurs companies to offer extremely valuable products to the consumers. Thus, it supports the company to incur large profits and surpass the competition. The price tags of the products are generally kept on the steeper side because of their monopoly. Blue Ocean approach shuns the ideology of outperforming the competition and asserts to recreate the market boundaries and operate within the nascent space.

blue ocean strategy meaning

The kind of leadership and management required to initiate a Blue Ocean Strategy differs from the management of corporations that have short-term ambitions and mainly concentrates on increasing shareholder value by pushing up the stock prices via buybacks, mergers, and acquisitions. The Blue Ocean Strategy can be applied to all the sectors or, businesses and is not limited to just one kind.

On the contrary to the concept of Blue Ocean Industries, there exists Red Ocean Industries. Let us understand the concept in brief before moving to further analysis.

Red Ocean Industries

Red Oceans are those industries that are currently in existence or, what we call the contested market forum.

In Red Oceans, there are well-defined industry perimeters that are known and out in open to all. Due to the acquaintance with the competitive rules and acceptance of the drawn boundaries, the market space gets crowded and there is a consequent reduction in growth and profitability. When the product comes under the burden of pricing pressure there is always a chance that a firm’s operations could come under notable menace.

competition red ocean strategy

Companies under Red oceans strive to outperform their rivals by grasping a higher proportion of existing market share at another company’s loss. In order to keep themselves afloat in the marketplace, proponents of Red Ocean Strategy concentrate on creating competitive advantages by examining the blueprints of their peers/competitors. Such a saturated market space makes way for a toxic competition which ends up as nothing but an ocean full of rivals fighting over a dwindling profit pool. Such firms mainly seek to capture and redistribute wealth instead of creating wealth.

These kinds of market forums can be correlated with the shark-infested ocean waters which remain spilled with blood. Hence, the coinage of the term Red Oceans. Thus, the business world has pulled up their socks and is striving to skip the “Red Oceans” to create their very own “Blue Oceans”.

BLUE OCEAN STRATEGY VS RED OCEAN STRATEGY

(Image Credits: Blueoceanstrategy.com)

Examples of Blue Ocean Industry

Let us learn how organizations that have followed the path of Blue Ocean Strategy has undergone outstanding growth and profitability!

1) UBER

Uber Cab is a brainchild of the Blue Ocean Strategy and has dramatically transformed the picture of the transportation industry by discarding the nuisance of booking cabs, denial of services, meter issues and unwanted arguments.

It is a ridesharing service that enables customers to book their rides with the ease of swipes and taps. It also permits users to trace a  driver’s progression towards the pickup point in real-time through the medium of a smartphone application called Uber App.

Uber devised a new market by the amalgamation advanced technology and modern devices. It tried to differentiate itself from the regular cab companies and in turn developed a low-cost business model that offers flexible payments, pricing strategies and generates good revenues for both the drivers and the company. In the initial stages, Uber was successful in capturing the uncontested market space but was eventually flooded by the competitors. In spite of that, it continues to command the market and is speedily expanding across the world. As of 2019, Uber approximately has 110 million riders worldwide and holds 69% of the market share in the United States.

2) iTunes

Apple headed into the space of digital music with its unique and eminent product ie. iTunes in 2003. In previous days, conventional mediums like compact discs (CD) were put to use to disseminate and listen to music.

When iTunes ventured into the market, it solved the basic problems which were faced by the recording industry. As a result, iTunes cut down the practice of illegally downloading music while simultaneously catering to the demand for single songs versus entire albums in a digitalized version. High-quality music at a reasonable price offered by Apple became a talk of the town. All the available Apple products have iTunes to download music and have largely ruled the market space for decades. It is also recognized for driving the growth of digital music.

These examples of the Blue Ocean Strategy can enlighten future startups regarding the execution of a  strategic planning scheme and successfully unlocking new demand.

How to find and develop/Launch them?

Blue Ocean Strategy becomes the need of the hour when supply surpasses demand in a market. When there is limited scope for further growth, businesses try and search for verticals for discovering new business lines where they can enjoy the advantage of uncontested market share or ‘Blue Ocean’.

In order to find and identify an attractive  Blue Ocean, one needs to take into consideration the “Four Actions Framework” to devise the aspects of buyer value in creating a new value curve. The Four Actions Framework emulates strategic triumphs and guides towards the path of launching a Blue Ocean initiative.

The framework poses four key questions, namely:

A) Raise

It includes points that must be blossomed by industry in reference to the line of products, price tags and caliber of services. A startup must analyze the pros and cons of the existing organizations and their strategies for key aspects of differentiation.

2) Reduce

It points out the arenas of an organization’s product or, service which foreplays a crucial character in the industry but is not absolutely essential in nature. Therefore,  the proportion of the products can be curtailed without entirely eradicating them.

3) Eliminate

It points out the arenas of an organization or industry which could be eliminated absolutely for the purpose of cutting down the costs and also to fabricate a completely new market. At times, newly invented products can lead to self-assassination of the existing products and thus,  leads to an unwillingness to interfere with the current revenue source.

4) Create

It nudges the companies to shape up trailblazing products. The introduction of an entirely new product line or, service leads to the establishment of a new market and points of differentiation. Identification of the needs of the target market provides sound knowledge regarding the addition of unique measures and consequently tracking the progress for illustrating a Blue Ocean.

Now that we have discussed the Blue ocean strategy and how to find them, let us also discuss the pros and cons of this strategy.

Pros of Blue Ocean Strategy

Here are a few of the advantages of using the blue ocean strategy:

  1. Blue Ocean Strategy cooperates with organizations to find uncontested markets and avoid matured and saturated markets.
  2. It assists to move from the impediments of competing within the existing industry and cost structure and to gradually migrate towards constructive value improvement. In short, it demonstrates how to break free from the traditional strategic models and to expand profitability and demand for the industry by using the analysis.
  3. Value innovation is the backbone of a Blue Ocean Strategy. Value innovation is the alliance of innovation with price, utility, and cost positions. It eventually creates new value/demand for consumers and thereby, expands the chances of growth potential.
  4. Blue Ocean Strategy enables a fundamental transformation in mindset. It develops mental horizons and helps in recognizing the opportunities.
  5. Blue Ocean Strategy is based on “time and again” proven data rather than unproven theories. It is based on practical approaches that have proven results during live market executions.
  6. Products under the concept of the Blue Ocean Strategy doesn’t make a consumer choose between value and affordability. It is the simultaneous pursual of differentiation and low-cost theorem.
  7. Creating blue oceans is non-zero-sum with high payoff possibilities.

Cons of Blue Ocean Strategy

Let’s us also look at a few of the common cons of using this strategy:

  1. It’s quite difficult to come up with futuristic ideas and identify colossal and untapped markets.
  2. Nominating an articulate Blue Ocean Strategy is a result of a calculated and detailed research process backed by extensive analysis. It is to be kept in mind that there is no magic formula or, silver bullet.
  3. Venturing into a market in the early phase comes with baggage of risk. There is a high possibility that the customers might not understand the grass root of the products and services because of the absence of a fully developed technology.
  4. Production of a new market is never easy because an organization has to be smart and clear regarding its customer base and ways to impart education about new ideas, new products, and new solutions. It also requires clarity about the trade-offs, obstacles and the workforce.
  5. Opting for a different ocean i.e the Blue Ocean, requires a lot of patience, persistence trust, preparation, and faith. It is also extremely paramount to look at initial indicators for confirming the fact that “fishing”  is not being done in a dead sea.
  6. On finding a new ocean, other sharks from the saturated markets aka the Red Oceans and other adjacent oceans will be lured to the new market. Thus, building strategically defensive alternatives would be a wise step. Defensive alternatives majorly consist of brand power, technological advancement, and speed of execution.

Also read: What is a BCG Matrix? Explanation with Example!

Summary

Let us quickly summarise what we discussed in this article.

A path-breaking strategy known as Blue Ocean Strategy is a pacifist marketing scheme and is considered a strategic planning tool for assessing a business. It is all about devising and acquiring the uncontested market forum by spawning a new demand. Since, the industries are in a state of non- existence, there is absolutely no relevance of peer comparison. The strategy bags the new demand by familiarizing unique products with advanced features that stand apart from the crowd. Blue Ocean approach shuns the ideology of outperforming the competition and asserts to recreate the market boundaries and operate within the nascent.

These days, the Blue Ocean Strategy becomes the need of the hour when supply surpasses demand in a market. In order to find and identify an attractive  Blue Ocean, one needs to take into consideration the “Four Actions Framework” to devise the aspects of buyer value in creating a new value curve. The framework poses four key questions, namely, Raise, Reduce, Eliminate & Create.

That’s all for this article. Let me know what you think about the blue ocean strategy in the comment section below. Cheers!

Why Alcohol Prohibition Lifted in India

Alcohol Prohibition Lifted in India – A Dream Too Good?

Understanding Why Alcohol Prohibition Lifted in India: On May 4th the Central Government lifted the prohibition on liquor sales. What followed was a parade through all news outlets exhibiting Indians risking their lives in thousands just to feel half-seas over. Media focus on movie box office records has been replaced by alcohol day to day sales records being reported during the pandemic. Today we try to unravel why the center decided to do so and what possible implication it could lead to.

What does alcohol mean to the government?

— Alcohol and the Soviet Union

Mikhael Gorbachev, although some might know him as the Soviet Union President during its collapse, our generation will famously remember his character played in the TV show Chernobyl ( Another disaster he oversaw as President). In 1985 Gorbachev started an anti-alcohol campaign due to its ill effects on health and crime in society.

In the first half of the 1980s, 13000-14000 deaths were drunk accidents. Over 800,000 people were caught for drunk driving and by 1985 these numbers kept increasing. The soviet union faced multiple problems due to the influence of alcohol. Accidents at work were common and at a period the condition worsened to a point where crops were not even gathered due to intoxicated farmworkers (Socialism, SMH).

Gorbachev’s campaign was a success and the government claimed increased life expectancy in males and even reduced crime rate. But all this was just a silver lining to a darker cloud. The loss of 100 billion rubles of revenue from alcohol sales led to an economic crisis after the alcohol sales moved to the black market. The campaign ended in 1987. The Berlin wall fell in 1989. The Soviet Union collapsed in 1991.

— Alcohol and India

booze money in India finshots

(Image Credits: Finshots)

The data presented above shows the revenue a state earns from the sale of alcohol. Alcohol revenues make up to 20%  of a state’s revenue. In the midst of the pandemic states like Delhi have faced a 90% fall in their revenues. For the state governments to fight the virus without any source of income will only lead to a nationwide economic crisis.

Punjab was the only state to officially request the government to ease restrictions over the sale of alcohol. Several other states like Karnataka, Maharashtra, Haryana, Rajasthan, Kerala, Tamil Nadu, Goa, and those in the Northeast raised the issue informally.

why government lifted restriction on alcohol sale

The states named in no way represent a stereotype of the people’s dependence on alcohol but instead how the state governments depend on alcohol. Investing in alcohol has been the simplest and most profitable source of income for the state governments. In 2017 as per the Kerela State Beverages Corporation (BEVCO) earned around Rs.600 for every Rs. 100 spent on alcohol. This example sums up why a government would actually consider investing in alcohol-based businesses. It incomes earned also explain why the prohibition on alcohol sale had to be lifted.

Problems with alcohol prohibition

Gujarat, Bihar, Nagaland, and Mizoram are the states in India that have prohibited all sale of alcohol to its citizens. It can already be estimated that just like Delhi, these states too will face a huge loss of revenue due to the lockdown. But these are just the beginning of their financial troubles as they would not be able to raise revenue from alcohol sales either.

If we believe that these dry states are successful in the prohibition of liquor it would present us to be too naive. By banning liquor the governments have only succeeded in diverting the funds from their pockets to the black markets. 

Similar bootlegging practices can be expected in a nationwide prohibition. But what is even more troubling features of the prohibition are the thefts and the scams. An alcohol store, for example, was looted for 4.18 lakhs in Bengaluru. Scams promising delivery of alcohol had already begun to see the light of day during the 40 days of prohibition.

Even the manufacturing of illicit liquor saw an increase. The consumption of such illicit liquor is much more dangerous and harmful to health. All these crimes have resulted in wastage of police resources. The energies that could be focussed on controlling the virus were spread to solve these cases which could have been avoided.

Raising the price of Alchohol

After the confusion and the idea of social distancing being flouted on the first day of the alcohol prohibition being lifted, the government resorted to discourage guzzlers by raising the taxes. The Delhi government added a 70% corona tax. The state of West Bengal levied a 30% tax. However, the highest increase in the prices was from the Andhra Pradesh government. The prices were 75% higher after 3 revisions. The Karnataka and Tamil Nadu government also raised the excise on alcohol.

— The relation between prices and Alcohol

The reasons for the increased price lie in obtaining the twin objective of raising revenues and discouraging alcohol purchase. This is so that lesser people venture out of their homes in search of alcohol. A survey conducted in North West England with 22,780 in 2008 speaks differently. It was conducted to explore alcohol consumption changes if the prices were adjusted.

According to the survey, 80.3% considered a lower alcohol price would increase consumption. 22.1% considered that rising prices would reduce consumption. This meant that alcohol consumption was lower price elastic. This meant that you could lower alcohol prices to increase its consumption but an increase in price would still keep consumption at the regular levels. In other words, you can increase the harm by reducing the prices but not reduce the harmful effects of alcohol by increasing prices.

— Alcohol and Growth

Alcohol Prohibition Lifted

( Source: The prices above are from the year 2017. The government would earn over 600% in the case above)

In India, a major portion of alcohol consumption is from the middle and lower-income groups. An increase in the prices of alcohol would not discourage a habitual drinker as discussed earlier. This increase would just decrease the disposable income or savings available for essential goods. Their spending on alcohol would deprive their children of nutrition and families of other essentials.

We just had a look at the impact of increased prices from an individual’s perspective. Let us have a look at what would be the case if due to this the consumption of essential goods is reduced in the economy. At the end of the day, it is essential goods that have the ability to kickstart the economy and not alcohol products. It is the demand for essential products that will enable industries to employ more labor. A study of the US states between 1971 to 2007 found that a 10% increase in per capita beer consumption resulted in a 0.41 percentage point drop in the annual income growth. The government has successfully increased its revenue but unfortunately directed demand away from essential products.

Also read: [COVID19] 10 Most Severely Affected Industries by Coronavirus

Which Direction to head in?

The points raised above have built walls to every decision taken in association with alcohol prohibition being lifted. The only exception being the decision to lift the prohibition itself.

Firstly the economy is too dependant on alcohol. The government cannot harvest any other source of income and liquor stores increase the risk of contraction. Secondly raising taxes does not discourage drinkers. Instead, it slows the opening of the economy. Thirdly a complete alcohol prohibition will only finance the black market and increases other crimes.

The following action taken by some state governments or possible consideration would help the government find a middle ground. Their application through states would result in being beneficial to both the government and the people.

— Open Alcohol outlets only after planning for appropriate social distancing measures.

The Supreme court on May 1st suggested the states to consider home delivery of alcohol. This would not only encourage social distancing the increased demand for home delivery would increase employment in the home delivery service. The food delivery company Zomato has already shown interest. This can be taken up by other delivery apps too. In a worst-case scenario even if any one of the parties comes in contact with someone who has contracted the virus, the linkage would be able to be traced by the app. This, however, should only be applied after ensuring age restriction are in place. West Bengal and Chattisgarh have already adopted the home delivery model.

The Delhi government has started issuing E-Tokens to buy liquor. Allowing only limited people at a set time only at particular stores with the pass. This also could also enforce social distancing but still involves the risk of venturing out.

— Reduce the price to levels the same as before the lockdown

The price increase has to be curbed. It is understood that the government is in dire need of income. This, however, will not even benefit the economy in the long term perspective as all revenue will stop once people run out of their savings. A habitual drinker will continue drinking even at higher prices. Also, the present condition involves people losing jobs and taking salary cuts. The price increase would do greater harm than good.

— Set a limit on Quantity

Settling a limit to the quantity available person is a very important step. We have already seen the survey earlier which concluded that a reduction in the prices would lead to increased demand. Hence applying the previous point without ensuring this will only negate all benefits. When clubbed with the first point, tracking the quantity via App or an online portal makes it easy.

All decisions being taken with the expectation of the worst would help us better prepare and forsee such situations. With no vaccine in sight for a year, all decisions must enable us to live accordingly for at least a year. The pandemic already has and will keep changing the way we live forever. Online Delivery with limits is the new Black!