Thursday, May 4, 2017

Better financial year of FY 17.

All of us at Tejas Consultancy wish you a better financial year of FY 17. I sincerely hope that the subdued expectations all around has room for positive surprises due to the many small things which are falling in place.
key calls for the markets in FY 17 are:
1.A range bound equity market at best.
2.Long short /Absolute return seeking strategies will continue to outperform relative return strategies
3.Muted returns from duration play on Fixed Income
4.Higher Gold prices in rupee terms
5.Stagnant residential real estate prices
6.An increase in commercial rental yields
7.Stronger dollar and weaker EM currencies
8.Stagnant to lower commodity prices
We hope that we are way off the mark on all the above counts and that can only mean that
1.Global demand has revived even despite its current low probability
2.Domestic earnings revival is led by rural demand and the 7th pay commission effect and outweigh the possible slack on the exports side of the economy
3.Inflation collapses and / or Government meets with its fiscal deficits leading to higher bond prices.
4.Personal savings revive enough to bring forth household leverage, that’s required to revive the demand for real estate.
Going forward, under stable market conditions we expect the our recommended portfolio to continue its out performance given the higher earnings growth differential.
Request you to pass it on whosever can benefit from it.

India's digital opportunity to overtake China

India's digital opportunity to overtake China

The Economist has an excellent story about the spectacular growth of China's online financial intermediation market,
By just about any measure of size, China is the world’s leader in fintech. It is far and away the biggest market for digital payments, accounting for nearly half of the global total. It is dominant in online lending, occupying three-quarters of the global market. A ranking of the world’s most innovative fintech firms gave Chinese companies four of the top five slots last year. The largest Chinese fintech company, Ant Financial, has been valued at about $60bn, on a par with UBS, Switzerland’s biggest bank... Its fintech giants have shown what can be done. For emerging markets, the lesson is that with the right technology, it is possible to leapfrog to new forms of banking. For developed markets, China offers a vision of the grand consolidation—apps that combine payments, lending and investment—that the future should hold... For about 425m Chinese, or 65% of all mobile users, phones act as wallets, the world’s highest penetration rate, according to China’s ministry of industry and information technology. Mobile payments hit 38trn yuan ($5.5trn) last year, up from next to nothing five years earlier—and more than 50 times the size of the American market.
This carries the greatest relevance for India, where digital transactions market may be just about to explode. And it carries one advantage which even China cannot boast of, Aadhaar, the biometric identity which already covers more than a billion Indians.

I can foresee the potential of five disruptions in the retail payments market from the initiatives already underway. 

1. The RuPay payment gateway has, as I blogged earlier, the potential to break the oligopolistic stranglehold of Visa, MasterCard, and Amex on the payment gateways market. 

2. The Unified Payment Interface (UPI) supports immediate transfer of money between different bank accounts. It addresses the challenge of inter-operability among different banks and merges several banking features, seamless fund routing and merchant payments into one interface. It also dispenses with smart card based validation and provides competition for payment wallet services like PayTm. Users can download the respective bank UPI app. 

3. The BHIM app is a digital payments app based on UPI that is promoted by the National Payment Corporation of India (NPCI), and has the potential to disrupt the market for e-wallet services. It uses the Aadhaar number for transacting over the UPI, it also has the potential of becoming the go-to immediate payment interface, eliminating the need to have individual bank UPI apps. It overcomes the limitation of existing e-wallet providers who require transferring money into the wallet and closed loop nature of transactions (transfers only from one wallet account to another), and offers the same set of services by directly intermediating with your existing bank account.  

4. The Aadhaar Enabled Payment System (AEPS) potentially dispenses with the the need for intermediaries like wallet service providers by using Aadhaar to achieve single-click two factor authentication. 

5. The BharatQR Code is the world's only interoperable payment system across merchant outlets. It creates a single national standard for all QRCode based transactions. This interoperability means that it can potentially dispense with Point of Sales terminals. The BHIM app supports BharatQR code based transactions, thereby raising the possibility of all kinds of immediate payment transactions with Aadhaar validation, without any intermediary service providers between the bank and the user.   

In countries where trust in online payment mechanisms and private financial intermediaries is a major constraint, government intervention may be useful to catalyse the market. A rural user is far more likely to trust a government sponsored financial intermediation than a similar service offered by a private provider. The challenge for the government is to understand when and where to step back and let the market take-over. 

Interestingly, all these are focussed on the payments side. Unlike the Chinese market, none of these innovations cover the lending and investing parts of the intermediation market. That may be the next frontier. And this again from China assumes significance for India's financial inclusion campaign,
Until recently, Chinese savers faced two extreme options for managing their money: stash it in bank accounts, where interest rates were artificially low, but it was as safe as the Communist Party; or punt on the stockmarket, about as safe as playing baccarat in a casino in Macau. In the middle there was nothing... The biggest breakthrough was the launch of an online fund, Yu'e Bao, by Alibaba in 2013... promoted as a way for people to earn interest on the cash in their e-commerce accounts... Invested through a money-market fund... this meant that savers could get rates that were more than three percentage points higher than those banks offered. And risk was minimal, because their cash was still ultimately in the hands of banks. Yu’e Bao attracted 185m customers within 18 months, giving it 600bn yuan of assets under management... In 2014 Tencent launched Licaitong, an online fund platform linked to WeChat. Within a year, it had 100bn yuan under management... In the West people generally need deep pockets before they can afford to buy into products such as money-market funds. In China all it takes is a smartphone and an initial buy-in of as little as 1 yuan. WeChat, with 800m active accounts, and Ant, with 400m, can afford to be generous.

Tuesday, March 28, 2017

India's campaign finance reform journey

India's campaign finance reform journey

The recently passed amendments to the Finance Bill 2017 by the Lower House of the Indian Parliament includes a provision to remove the caps on undisclosed donations to political parties. Critics are right in questioning the wisdom of pushing through such an important decision as part of a Money Bill. And it is most likely that this would be litigated and stuck down by the Supreme Court. 

But their critique that this would weaken campaign finance reforms is arguable. In fact, I am inclined to argue that lifting the cap on corporate donations may be a prudent compromise, though the government may have ended up overreaching with its other elements. 

The conventional wisdom on campaign finance reforms advocate a simultaneous pursuit of transparency (limiting cash donations), competition (capping of donations), and deter cronyism (making their disclosure mandatory). 

While logically unexceptionable and intellectually laudable, I am inclined to believe that this is impractical given the political economy and the scale of transformation that it would entail. Given the prevailing nature and scale of campaign financing, the massive gap between the actual and permissible amounts, and the difficulty of cobbling political consensus on such issues, it is surely unrealistic to expect a simultaneous targeting of all dimensions with one comprehensive strategy. 

A more realistic approach to addressing campaign finance may be to take a few steps at a time. Between the three, it may be prudent to address transparency initially by squeezing out channels of cash donations and ensuring that only clean money enters the political arena. While the decision to dispense with the cap on donations may actually be a practical response, the waiver of disclosure requirements is a retrograde step. The latter becomes all the more so since maintaining the current disclosure requirements would have been politically feasible. 

Instead of the current proposal, it would have been more appropriate and practical to have a much higher cap than the (now amended) 7.5 per cent of the average net profit over the past three years and either retain the current disclosure requirement or link disclosure to the revised cap. A progressive reduction of that cap would then have become the natural phasing of campaign finance reforms. Now, anonymous corporate donations have been given a complete free pass. And future reforms have to battle insertion of the caps on both donations and disclosure requirements.  

The credibility of government's commitment to campaign finance reforms will be measured by complementary measures to strengthen the rigour of audits and tax filings of political parties as well as enforce-ability of their violations. 

In any case, as already mentioned, I feel that the last word on this enactment may yet come from the Supreme Court, and it is here that some of the aforementioned suggestions can be considered.