It has been ages since we have witnessed revolution in Banking products. And of course, internet was the last new and so called innovative channel of acquiring customers. To be honest, banking is an industry meant for shrewd, conservative people who hate innovation as time and again it has been proven that innovation almost inevitably ends in busts. The recent subprime crisis is just a grim reminder of the same. Wait a sec! Does that mean we really can't push the frontiers of banking?
If you ask me, I see a whole new vista of banking possible. A channel called Mobile!!! And yes, I am not kidding. Everyone must have already read that Smart phones and mobile commerce are going to witness an explosive growth. And all the major banks in the world have religiously lined up something to capture this mobile commerce share. And all of these things involve using a person's existing Credit / Debit card. Why aren't banks planning to use this as a channel to acquire new customers? Especially the banks that are small can really benefit from this.
Let me explain you how this is possible. The banks can try partnering with the network providers whop sell post paid plans. The objective is that the Banks should own the Credit limit offered by the Network providers. Say you have an Airtel post paid plan with Rs 4000. Now, Airtel can offload its credit risk by getting this backed by a bank like SBI or ICICI. With this the bank wins a customer. And in exchange for offloading this risk, the network provider can pay a small fee to the bank. That is stage 1. The second stage is eating into Mobile commerce world. As the Mobile customer has already got a Credit limit from the bank, he/she can charge all the transactions that are done on the internet using mobile to the same credit limit. And this credit limit can work like a normal credit card in that case :) Even old customers of cellular network company can be migrated to such a product. The beauty of such a Banking product is that, the banks get new customers without spending even an extra rupee. And the advantage to a network provider is that they offload their credit risk completely and can try selling more post paid plans.
The innovation on the banking + mobile need not stop here. We have just discussed a possible way to eat into the Mobile commerce. But, can we just ignore the huge volume of trade that happens in rural and semi urban areas of India (which are heavily underbanked) ? The answer is a resounding no. Once the network service providers start upgrading their existing prepaid connections to post paid (with some effort from the banks), the Stage 3 starts. Any two mobile holders who undertake a trade transaction, can pay the money via the mobile credit limit to the other. Lets take an example. Suppose that there are two parties A & B. A is a farmer who wants to buy fertilizers from B. The transaction amount is say Rs 5000. A can simply transfer money to B buy sending an SMS. And as A and B already have preapproved credit lines from bank, organized banking has entered a transaction which would have earlier been impossible. All that the banks need to do is ensure that money is delivered to any specified bank account of B. And the network service provider acts as the collection agent from A. These kind of transactions make it possible for a bank to capture market share in areas where they don;t have any of their channels like branches, internet or even kiosks
Doesn this sound too futuristic? I think this is quite possible provided that there are no regulatory hurdles :)
Friday, April 9, 2010
Tuesday, December 15, 2009
Is democracy all about just electing leaders???
This is a question that has been lingering in my mind for quite some time. Is democracy all about electing people to rule us? Elaborating on this, is democracy a form of government where elected representatives rule based on what they personally think is correct? OR is it a form of government that rules us based on the elected representative's ideologies and opinions after duly taking into account what the ruled thinks is correct? And does the citizen's responsibility end with just electing the leader to rule him/her? This article is about discussing if the opinions / views held by the elected representatives mirror the views of the voters and about ways to reduce the differences without undermining the power of legislators.
To give you a brief background, all the major democracies in the world have setups to ensure free and fair elections. And all the aspiring leaders come out and communicate with the masses. After the election is over, the "elected representative" starts voicing his/her opinion over a host of matters in the "House". The interesting things to be noted here are:
- The Elected member is supposed to be Representative for the Constituency. Yet, our Parliament or State legislature doesn't have any mandatory time allotted / specific forum for discussion of problems faced by every constituency individually. We are definitely not expecting our elected leaders to deal with only matter of "national significance" only in the house. And it will be even more foolish to expect our elected leaders to compete with each other to get a "chance" to voice the concerns of their electorate. The House is definitely not a market place where the seller with the most enticing offer or loudest voice gets noticed. Every representative should have equal opportunity to discharge his basic responsibilities. It is common sense to have some formal process with a mandatory time allocation to discuss and resolve some of the common problems people in constituencies face.
- Apart from the time of election, where the popular vote decides the winner based on the manifesto, there are rarely cases when any elected leader goes out into masses to know the public pulse. The thing that intrigues me is the fact that our constitution has left out this "knowing the pulse of population" to the personal choice of the elected representative. In my view, this is of paramount importance because if the elected leader has no formal mechanism of knowing pulse of the people, how can his / her view be touted as the view of public he / she represents? The legislator has a fiduciary relation with the voter who elected him / her and it is his responsibility to consult him / her on important issues before acting. A case in example is a Financial Advisor. Lets assume that I have opened a Wealth management Account with HSBC. I will be having a Financial advisor whose responsibility is to consult me, advice me and act on behalf of me to multiply my wealth. Suppose that he has identified Franklin templeton as the fund that returns maximum investment, even though he has Power of Attorney, he should consult me before he makes a sizable investment and brief me about the risks. Same logic has to be applied for a legislator
- Thirdly, we need to have an appointment to meet our legislators or go in groups to mention the issues we have in a petition. I understand that they are busy guys literally juggling various responsibilities. But, their primary responsibility is to represent us and hence it is important that they have at least a formal mechanism where in they hear my concerns and I am told of the status on it.
- Finally, when the house is passing bills of national importance, legislators vote based on their opinions. And most of the times, there is a conflict of interest as the legislator has to choose between his political / business interests vs the interests of the voters. Practically, this conflict of interest cannot be eliminated. Lets take the case of 123 nuclear deal or the bill to set up National Investigation Agency or the current movement to grant a statehood to Telangana or the Climate change related stuff...
People say that Media performs takes up these responsibilities by acting as the intermediary between the government and the public. Media helps people voice their opinions and make their voices heard by the government. Further, it helps in disseminating information from various departments of government so that public are up to date on various policies and their implications. Had media discharged all these responsibilities properly, there would have been no need for this blog!!!!
The very fact that media houses run businesses means that they have an interest that is different from the above stated noble service. One of the primary activities of the media in the real world is to take up some stands and lobby for those views rather than acting as sources of unbiased information. And they do get paid for that!!!
In the current form of democracy, there is a high chance of having a disconnect between the ideas / opinions of the elected representatives and the electorate. It is reasonable to assume that the elected representative is a subject matter expert. But, his / her views also need to take the opinion of masses (in a binding / non binding fashion depending the issue) before making decisions. To do this:
- Have a grass root level system where voters can provide guidance to the legislator in areas where wants opinion.
- Provide a forum / setup dedicated to listen to the concerns of every constituency.
- Make room for referendums in issues of national importance to allow greater transparency.
The following are some of the specific details about how the above ideas can be implemented with ease:
- To help the elected representative to stay in touch with the electorate desires, there should be an online voting system in the local panchayat office / post office. All the elected representative needs to do is, post a poll like:
- Do you think India should accept legally binding Emission cuts in Copenhagen?
a. Yes
b. No
And the above poll should be kept open for a small period of time, say 4 weeks. The fact that responses are being collected should be aptly publicized be printing the current poll questions in a small section in the regional / national newspapers available in that region.
The advantages are simple... People who think that they should vote on a serious issue, they can pass their opinion to the legislator... This is an age old form of democracy called "direct democracy" or "referendum". All we need to do is just have th system in place to have a non-binding referendums. This increases transparency with minimal costs
- In the same system in panchayats / post offices, the govt can also have the option of letting a person raise an issue directly to the legislator that needs to be discussed in the house. It is the equivalent of a Public Interest litigation that is filed be an individual in a Court. The nitty gritties of such a system need to be thought out to account for the possible inundation of legislator's office with trivial issues. But, the bottomline is the freedom for voters to initiate a matter to be discussed in the house via his/her legislator.
- To deal with the issue that every legislator speaks about the concerns of his constituency, a forum should be created where the legislator from every constituency speaks about the issues raised by the voters via the system mentioned in the above point and gets the government's response to it. Further, the legislator should also be given the freedom to discuss about any other issues about his/her constituency though not raised by any voter. The entire objective of this forum is to limit the discussion to the issues of a constituency. In my view, providing an assured opportunity to voice the concerns of a constituency (though it may not be of national importance) is the spirit of having democracy. If a legislator elected from Bangalore never speaks of the issues his electorate faces in the house, there is no point in electing him. And there are such cases. If you have a system where in electorate can directly raise the issue and a formal set up where such things have to be discussed, the legislator will be under greater pressure to deliver results.
- Finally, Indian constitution should be amended to introduce compulsory binding referendums in certain areas like deciding foreign policy changes, taking substantial foreign loans, increasing taxes, impeaching key officials etc.... These aer the areas where the legislators can literally have conflict of interest and pass their own opinion as public opinion though the ground reality can be different.
The bottom line is: A true democracy is a form of government of elected representatives who rule citizens of a country after clubbing their personal wisdom, the insights from the governmental departments and the views of the Citizens of the country. And the primary responsibilities of the citizens of a democratic country are two fold:
- Electing the appropriate leader.
- Communicating their views to the elected leader when asked for / proactively in some cases
The last point is the thing that is missing in most democracies in the world. In the current form of democracy, people convey their dissent / satisfaction over a leader in elections. It is not issue specific. An efficient system always has a real time feed back loop and a Democratic system is no exception!!!!
To give you a brief background, all the major democracies in the world have setups to ensure free and fair elections. And all the aspiring leaders come out and communicate with the masses. After the election is over, the "elected representative" starts voicing his/her opinion over a host of matters in the "House". The interesting things to be noted here are:
- The Elected member is supposed to be Representative for the Constituency. Yet, our Parliament or State legislature doesn't have any mandatory time allotted / specific forum for discussion of problems faced by every constituency individually. We are definitely not expecting our elected leaders to deal with only matter of "national significance" only in the house. And it will be even more foolish to expect our elected leaders to compete with each other to get a "chance" to voice the concerns of their electorate. The House is definitely not a market place where the seller with the most enticing offer or loudest voice gets noticed. Every representative should have equal opportunity to discharge his basic responsibilities. It is common sense to have some formal process with a mandatory time allocation to discuss and resolve some of the common problems people in constituencies face.
- Apart from the time of election, where the popular vote decides the winner based on the manifesto, there are rarely cases when any elected leader goes out into masses to know the public pulse. The thing that intrigues me is the fact that our constitution has left out this "knowing the pulse of population" to the personal choice of the elected representative. In my view, this is of paramount importance because if the elected leader has no formal mechanism of knowing pulse of the people, how can his / her view be touted as the view of public he / she represents? The legislator has a fiduciary relation with the voter who elected him / her and it is his responsibility to consult him / her on important issues before acting. A case in example is a Financial Advisor. Lets assume that I have opened a Wealth management Account with HSBC. I will be having a Financial advisor whose responsibility is to consult me, advice me and act on behalf of me to multiply my wealth. Suppose that he has identified Franklin templeton as the fund that returns maximum investment, even though he has Power of Attorney, he should consult me before he makes a sizable investment and brief me about the risks. Same logic has to be applied for a legislator
- Thirdly, we need to have an appointment to meet our legislators or go in groups to mention the issues we have in a petition. I understand that they are busy guys literally juggling various responsibilities. But, their primary responsibility is to represent us and hence it is important that they have at least a formal mechanism where in they hear my concerns and I am told of the status on it.
- Finally, when the house is passing bills of national importance, legislators vote based on their opinions. And most of the times, there is a conflict of interest as the legislator has to choose between his political / business interests vs the interests of the voters. Practically, this conflict of interest cannot be eliminated. Lets take the case of 123 nuclear deal or the bill to set up National Investigation Agency or the current movement to grant a statehood to Telangana or the Climate change related stuff...
People say that Media performs takes up these responsibilities by acting as the intermediary between the government and the public. Media helps people voice their opinions and make their voices heard by the government. Further, it helps in disseminating information from various departments of government so that public are up to date on various policies and their implications. Had media discharged all these responsibilities properly, there would have been no need for this blog!!!!
The very fact that media houses run businesses means that they have an interest that is different from the above stated noble service. One of the primary activities of the media in the real world is to take up some stands and lobby for those views rather than acting as sources of unbiased information. And they do get paid for that!!!
In the current form of democracy, there is a high chance of having a disconnect between the ideas / opinions of the elected representatives and the electorate. It is reasonable to assume that the elected representative is a subject matter expert. But, his / her views also need to take the opinion of masses (in a binding / non binding fashion depending the issue) before making decisions. To do this:
- Have a grass root level system where voters can provide guidance to the legislator in areas where wants opinion.
- Provide a forum / setup dedicated to listen to the concerns of every constituency.
- Make room for referendums in issues of national importance to allow greater transparency.
The following are some of the specific details about how the above ideas can be implemented with ease:
- To help the elected representative to stay in touch with the electorate desires, there should be an online voting system in the local panchayat office / post office. All the elected representative needs to do is, post a poll like:
- Do you think India should accept legally binding Emission cuts in Copenhagen?
a. Yes
b. No
And the above poll should be kept open for a small period of time, say 4 weeks. The fact that responses are being collected should be aptly publicized be printing the current poll questions in a small section in the regional / national newspapers available in that region.
The advantages are simple... People who think that they should vote on a serious issue, they can pass their opinion to the legislator... This is an age old form of democracy called "direct democracy" or "referendum". All we need to do is just have th system in place to have a non-binding referendums. This increases transparency with minimal costs
- In the same system in panchayats / post offices, the govt can also have the option of letting a person raise an issue directly to the legislator that needs to be discussed in the house. It is the equivalent of a Public Interest litigation that is filed be an individual in a Court. The nitty gritties of such a system need to be thought out to account for the possible inundation of legislator's office with trivial issues. But, the bottomline is the freedom for voters to initiate a matter to be discussed in the house via his/her legislator.
- To deal with the issue that every legislator speaks about the concerns of his constituency, a forum should be created where the legislator from every constituency speaks about the issues raised by the voters via the system mentioned in the above point and gets the government's response to it. Further, the legislator should also be given the freedom to discuss about any other issues about his/her constituency though not raised by any voter. The entire objective of this forum is to limit the discussion to the issues of a constituency. In my view, providing an assured opportunity to voice the concerns of a constituency (though it may not be of national importance) is the spirit of having democracy. If a legislator elected from Bangalore never speaks of the issues his electorate faces in the house, there is no point in electing him. And there are such cases. If you have a system where in electorate can directly raise the issue and a formal set up where such things have to be discussed, the legislator will be under greater pressure to deliver results.
- Finally, Indian constitution should be amended to introduce compulsory binding referendums in certain areas like deciding foreign policy changes, taking substantial foreign loans, increasing taxes, impeaching key officials etc.... These aer the areas where the legislators can literally have conflict of interest and pass their own opinion as public opinion though the ground reality can be different.
The bottom line is: A true democracy is a form of government of elected representatives who rule citizens of a country after clubbing their personal wisdom, the insights from the governmental departments and the views of the Citizens of the country. And the primary responsibilities of the citizens of a democratic country are two fold:
- Electing the appropriate leader.
- Communicating their views to the elected leader when asked for / proactively in some cases
The last point is the thing that is missing in most democracies in the world. In the current form of democracy, people convey their dissent / satisfaction over a leader in elections. It is not issue specific. An efficient system always has a real time feed back loop and a Democratic system is no exception!!!!
Tuesday, December 1, 2009
Sovereign Wealth fund as an Economic and Foreign Policy Tool
Sovereign wealth funds, as defined by the U.S. treasury, are government investment funds, funded by foreign currency reserves but managed separately from official currency reserves. The SWFs invest their money primarily in forein countries, i.e, a Gulf SWF will invest heavily in non-Gulf assets. Currently, the SWFs hold assets to the tune of $3.8 Trillion. Generally, the SWFs are funded by the Forex Reserves, Public Sector Enterprise Reserves, Public Pension / Welfare funds or Surpluses arising out of Exporting some commodities. States / Countries like UAE, Singapore, China etc... hold vast amount of assets via SWFs. SWFs are created by countries to create wealth for their country that can result in lower taxes for citizens or to better manage revenues for an export dependent country to counter the boom and bust cycles in trade. This is a brief background about SWF in a nutshell.
Does India already have a SWF?
The answer is both "Yes" and "No". Indian PSUs do invest in foreign countries and that is an equivalent of SWF. For eg., ONGC Videsh Ltd is a subsidiary of ONGC that primarily invests in foreign countries and is a kind of SWF. And is is not and SWF in true sense as the profits of ONGC Videsh are shared by all shareholders of ONGC and that includes private parties also. Further, all the investments made by ONGC Videsh are for purely Economic reasons.
Now, the question that arises is "Does India need a SWF and what should it be used for?"
This question has been mooted by the Finance ministry and RBI and they agree that it may be a good idea to have SWF with an initial investment of $10 Billion.
Firstly, lets discuss about the advantages India has with a large warchest in the form of SWF.
1. India can invest heavily in countries that are rich in natural resources and hence can secure its future requirements at ease.
2. The larger the SWF, the greater the firepower India has and the easier it becomes to compete with companies like China to get access to natural resources
3. A large SWF ensures that India has sizable interests in the world financial markets and hence can learn about the best in class practices from the firms it has invested in
4. A concerted investment strategy in the strategic industries in friendly / target countries means that India has a larger say in the final outcome of a key economic policy or foreign policy
5. India can undertake larger self-sustainable development projects in Africa, South America etc... and hence secure the support of those govts. in larger global forums in the areas of economy, defense and politics
6. The greater the amount of assets India controls in a country, the higher is the sway Indian diplomats have on the foreign and economic policy. Examples can be a neutral country supporting India over key issues like global warming. Economically, the target country can relax the trade barriers for India. In terms of defense, the country can technically be impelled to support india in case of a conflict with a state.
This blog is about discussing a new kind of SWF that can easily be 5 to 10 times the size that the govt is considering.
As per the current plan, the Govt of India is more interested in investing about $10 billion from our mammoth Forex reserves of about $280 billion in SWF that will invest in foreign assets. A central bank maintains Forex reserves with the primary intention of managing the foreign exchange rate stability and about $100 billion will give more than sufficient fire power to RBI to achieve that. As most of the current FOREX reserves are in Gold or US Treasury bills, the remaining $180 billion earn a measly 3-5% p.a. This is a bad economic decision by choice!!!
There is no point in India trying to stick to the conventional route of investing surplus money in SWFs. The following are some of the Unconventional routes it can take:
- Given the kind of advantages SWFs have, India can definitely afford more money from its Forex reserves. India can easily invest about 25% of its forex reserves without any impact on the monetary policy, i.e, ~$70 billion.
- LIC has about $173 billion portfolio of investments. As LIC is a fully govt. owned insurance company with a large float, the govt. can pass a law where in LIC is obligated to invest 10% of its portfolio via SWF. Dissolving this 10% portfolio of domestic investments won't have an impact on the domestic markets as there is always sufficient FII or MFs or DII money ready to make these investments in domestic market. So, LIC can potentially contribute $17.3 billion to SWF
- Employee Provident Fund is currently managing a portfolio of $50 billion with a view to pay out PF to claimants and the avg annual rate of interest it pays out is 8.5% p.a. Currently, this is a loss making portfolio as the ROI < 8% p.a A better way of managing these funds can be diverting 20% of this portfolio to SWF where you can earn higher economic returns and achieve strategic national interests. This contribution can be close to $10 billion
- New India Assurance is another Public Sector Insurance company with a $6.4 Billion portfolio. Applying the same logic as the one we have for LIC, a 10% redistribution of portfolio to SWF can potentially provide $640 MM to SWF
- In India, banks are required to invest close to 25% of the deposits they collect in Govt bonds to maintain the SLR prescribed by RBI. And these bonds are very low interest paying instruments for the banks. Currently, banks buy a variety of instruments from State govts that have very bad finances. As of now, the size of SLR holdings by Banks in India stand at $93 Billion. If the govt imposes a bit of Fiscal discpline in curtailing excessive borrowing by states with bad finances and divert 10% of these funds to SWF, the contribution can be as high as $9.3 Billion
- Indians have invested about $140 Billion via MFs in the Capital markets. A small regulatory change wherein all the MFs are mandated by law to invest 1% of their assets in bonds issued by Govt of India that invest in SWF will fetch $1.4 billion
Adding up all these contributions, the potential size of SWF can be $110 billion and this is 11 times the size of what our govt wants to launch. And if you have notices the sources of these funds, the govt doesn't need to borrow more or undertake massive cost cutting exercises. All it needs to do is show will power to redistribute the capital within in the system in a very small way.
If we assume that an SWF of $110 billion is launched and the following assumptions are made about future:
- The current size of India GDP is $1.25 Trillion and it will grow at avg pace of 8% p.a for the next 50 years (This is very optimistic and believe me the more optimistic the assumption on this is, the more conservative the estimate of the impact of SWF is)
- The contribution to SWF from the above sources grows at 15% p.a
- SWF earns Returns of 15% p.a (very conservative), pays out 6% p.a as Cost of funds (Conservative given the yield on SLR instruments and the govt. can actually make this as a law) and has about 1.25% as OPEX (based on MF financials and Economy of Scale)
- All the profits from SWF are reinvested at the same rate of return and expenses
- The SWF is launched in 2009 end
As per the above assumptions, the size of India's GDP at the end of 2040 will be $14.7 Trillion and the size of SWF will be $16 Trillion. Further, by the end of 2050, Indian GDP will be $32 Trillion and SWF will be $68 Trillion
The US GDP is $13 Trillion today and if we assume that they replicate their historic growth rate of 3% p.a, the US GDP will be only $44 Trillion in 2050.
In my argument, I have assumed that Indian GDP will continue at 8%. In reality, it may grow at far lower pace and hence India may be much smaller than US based on GDP in 2050.But the kind of clout India as a country will have in the world financial markets and economy just because of the size of its Asset holdings in foreign countries that can touch $68 Trillion under conservative estimates. And this calculation hasn't spoken about the kind of Investments Indian Private companies will make in the same time!!!
Bottom line: India need not wait to be an economic super power till it becomes a major player in global politics and economics. By realigning its capital right now, India's economic power will have a multiplier effect!!!!
Does India already have a SWF?
The answer is both "Yes" and "No". Indian PSUs do invest in foreign countries and that is an equivalent of SWF. For eg., ONGC Videsh Ltd is a subsidiary of ONGC that primarily invests in foreign countries and is a kind of SWF. And is is not and SWF in true sense as the profits of ONGC Videsh are shared by all shareholders of ONGC and that includes private parties also. Further, all the investments made by ONGC Videsh are for purely Economic reasons.
Now, the question that arises is "Does India need a SWF and what should it be used for?"
This question has been mooted by the Finance ministry and RBI and they agree that it may be a good idea to have SWF with an initial investment of $10 Billion.
Firstly, lets discuss about the advantages India has with a large warchest in the form of SWF.
1. India can invest heavily in countries that are rich in natural resources and hence can secure its future requirements at ease.
2. The larger the SWF, the greater the firepower India has and the easier it becomes to compete with companies like China to get access to natural resources
3. A large SWF ensures that India has sizable interests in the world financial markets and hence can learn about the best in class practices from the firms it has invested in
4. A concerted investment strategy in the strategic industries in friendly / target countries means that India has a larger say in the final outcome of a key economic policy or foreign policy
5. India can undertake larger self-sustainable development projects in Africa, South America etc... and hence secure the support of those govts. in larger global forums in the areas of economy, defense and politics
6. The greater the amount of assets India controls in a country, the higher is the sway Indian diplomats have on the foreign and economic policy. Examples can be a neutral country supporting India over key issues like global warming. Economically, the target country can relax the trade barriers for India. In terms of defense, the country can technically be impelled to support india in case of a conflict with a state.
This blog is about discussing a new kind of SWF that can easily be 5 to 10 times the size that the govt is considering.
As per the current plan, the Govt of India is more interested in investing about $10 billion from our mammoth Forex reserves of about $280 billion in SWF that will invest in foreign assets. A central bank maintains Forex reserves with the primary intention of managing the foreign exchange rate stability and about $100 billion will give more than sufficient fire power to RBI to achieve that. As most of the current FOREX reserves are in Gold or US Treasury bills, the remaining $180 billion earn a measly 3-5% p.a. This is a bad economic decision by choice!!!
There is no point in India trying to stick to the conventional route of investing surplus money in SWFs. The following are some of the Unconventional routes it can take:
- Given the kind of advantages SWFs have, India can definitely afford more money from its Forex reserves. India can easily invest about 25% of its forex reserves without any impact on the monetary policy, i.e, ~$70 billion.
- LIC has about $173 billion portfolio of investments. As LIC is a fully govt. owned insurance company with a large float, the govt. can pass a law where in LIC is obligated to invest 10% of its portfolio via SWF. Dissolving this 10% portfolio of domestic investments won't have an impact on the domestic markets as there is always sufficient FII or MFs or DII money ready to make these investments in domestic market. So, LIC can potentially contribute $17.3 billion to SWF
- Employee Provident Fund is currently managing a portfolio of $50 billion with a view to pay out PF to claimants and the avg annual rate of interest it pays out is 8.5% p.a. Currently, this is a loss making portfolio as the ROI < 8% p.a A better way of managing these funds can be diverting 20% of this portfolio to SWF where you can earn higher economic returns and achieve strategic national interests. This contribution can be close to $10 billion
- New India Assurance is another Public Sector Insurance company with a $6.4 Billion portfolio. Applying the same logic as the one we have for LIC, a 10% redistribution of portfolio to SWF can potentially provide $640 MM to SWF
- In India, banks are required to invest close to 25% of the deposits they collect in Govt bonds to maintain the SLR prescribed by RBI. And these bonds are very low interest paying instruments for the banks. Currently, banks buy a variety of instruments from State govts that have very bad finances. As of now, the size of SLR holdings by Banks in India stand at $93 Billion. If the govt imposes a bit of Fiscal discpline in curtailing excessive borrowing by states with bad finances and divert 10% of these funds to SWF, the contribution can be as high as $9.3 Billion
- Indians have invested about $140 Billion via MFs in the Capital markets. A small regulatory change wherein all the MFs are mandated by law to invest 1% of their assets in bonds issued by Govt of India that invest in SWF will fetch $1.4 billion
Adding up all these contributions, the potential size of SWF can be $110 billion and this is 11 times the size of what our govt wants to launch. And if you have notices the sources of these funds, the govt doesn't need to borrow more or undertake massive cost cutting exercises. All it needs to do is show will power to redistribute the capital within in the system in a very small way.
If we assume that an SWF of $110 billion is launched and the following assumptions are made about future:
- The current size of India GDP is $1.25 Trillion and it will grow at avg pace of 8% p.a for the next 50 years (This is very optimistic and believe me the more optimistic the assumption on this is, the more conservative the estimate of the impact of SWF is)
- The contribution to SWF from the above sources grows at 15% p.a
- SWF earns Returns of 15% p.a (very conservative), pays out 6% p.a as Cost of funds (Conservative given the yield on SLR instruments and the govt. can actually make this as a law) and has about 1.25% as OPEX (based on MF financials and Economy of Scale)
- All the profits from SWF are reinvested at the same rate of return and expenses
- The SWF is launched in 2009 end
As per the above assumptions, the size of India's GDP at the end of 2040 will be $14.7 Trillion and the size of SWF will be $16 Trillion. Further, by the end of 2050, Indian GDP will be $32 Trillion and SWF will be $68 Trillion
The US GDP is $13 Trillion today and if we assume that they replicate their historic growth rate of 3% p.a, the US GDP will be only $44 Trillion in 2050.
In my argument, I have assumed that Indian GDP will continue at 8%. In reality, it may grow at far lower pace and hence India may be much smaller than US based on GDP in 2050.But the kind of clout India as a country will have in the world financial markets and economy just because of the size of its Asset holdings in foreign countries that can touch $68 Trillion under conservative estimates. And this calculation hasn't spoken about the kind of Investments Indian Private companies will make in the same time!!!
Bottom line: India need not wait to be an economic super power till it becomes a major player in global politics and economics. By realigning its capital right now, India's economic power will have a multiplier effect!!!!
Wednesday, November 18, 2009
Tax - An outdate way of managing the Economic future of a Country
Common sense tells us that any expenditure that doesn't result in the creation of a long-term asset is not an attractive option. Most of the people and corporates do not like Taxes for the simple reason that they cannot see a tangible benefit because of it directly though most would agree that lack of them is going to cause a social unrest. Simply put, Tax is an expense for any individual / Corporate.
A traditional Fiscal policy revolves around managing the revenues by collecting taxes. Further, the capital investment made by private sector is manipulated by creating a Tax differential across industries. For eg., a lower taxes in IT industry will attract investments in IT Sector. This fiscal policy has an inherent flaw. By lowering the tax rate for IT industry, I am rewarding people who want to take risk. At the same time, companies who have been employing people for a long time and producing useful goods & services don't see any extra reward in continuing with their business at the same pace even though there is untapped market potential. Another disadvantage is that you can lower the tax rate yet not gain any capital inflows because of huge risks involved or because of lack of interest in the market opportunity. One such example can be the case of Micro Finance Institutions or Small Scale industries or Technology Start-ups etc..... The list goes on.
To have companies running in the above stated list, funds are required in large sums and govt cannot obviously have funds for all of them. And it cannot keep on raising taxes for higher revenues.
The basic problem that I am highlighting over here is the case of a govt that needs to have extra funds to carry out a number of its projects in its 5 year plans. One way is to fund them with taxes. The other way is to take loans. I propose a third way, i.e, seek equity participation of private sector in a compulsory way.
Lets assume that Corporate India pays 25% of its net profit as Tax to the govt. For simplicity's sake, govt. wants to focus primarily on building of Universities with world class research and this is the only focus of the govt. I suggest that the Govt, of India reduce the tax to 20% and charge 10% as Mandatory Equity Investment or Equity Convertible mandatory debentures. These form the capital of a new Special Purpose Vehicle whose sole objective is to invest in new Universities with Research as primary focus. Now, Govt can formulate a policy saying that 30% of the funds will be used directly by Govt. of India along with the loans it takes from nationalized banks / Treasury bills to directly build universities. The remaining 70% will be given as grants to Universities in exchange for Preferential shares / debentures that promise a minimum dividend / interest every year. The purpose of such a system is to ensure that the end entity (here it is the University) is legally bound to keep paying some money to the investor and hence has to be technically profit oriented and self sustainable. The SPV that invests or sets up the Universities will also be the collector of interests / dividends and makes the decisions for reinvesting those on a continuous basis as per its charter. The shares of this SPV are held in a pro-rate basis by the Companies who got the shares in exchange for the 10% Mandatory Equity Investment / Equity Convertible mandatory debentures. Now, the Govt should also list the shares of this SPV in all the Capital markets like BSE, NSE etc... so that the companies can trade these as normal securities. The issues of any lock in period or Taxation on Capital gain can be debated later.
The above approach of making Tax payers as an Equity owner in Self-sustainable ventures will have the following advantages:
- The Tax payer doesn't treat tax as an expense anymore. The company does see value in higher taxes as it is an investment
- The govt. can practically mop up extra funds without incurring any wrath from corporate side
- There is higher transparency and lower level of corruption in any program undertaken through such SPVs as these are legally bound to pay certain returns to their share holders and hence need to manage the business in a self sustainable way. And as the TAx payers are Preferential share owners with right to vote on certain issues, they can replace the management of the SPV and in this way the accountability of the management is maintained
- These SPVs are different from Public Sector Enterprises in the sense that the jobs in SPVs are equivalent to private jobs as Private players are the sole investors. These SPVs also have a profit motive and have some legal bindings to pay money to investors. Further, these SPVs donot come under the Govt as the govt is only involved in deciding the objective of the SPV at inception and it doesn't have any control on the operations
The above example of REducing corporate tax from 25% to 20% + 10% equity investment for a single focus can be expanded by the Govt. For instance, it can have 4 primary focus areas and this 10% is split into 4% for program A, 3% for program B, 2% for Program C and 1% for Program D. In this case, there will be 4 SPVs. Further, the govt can keep the # of programs fixed and change the programs every year to get funds for new programs.
A traditional Fiscal policy revolves around managing the revenues by collecting taxes. Further, the capital investment made by private sector is manipulated by creating a Tax differential across industries. For eg., a lower taxes in IT industry will attract investments in IT Sector. This fiscal policy has an inherent flaw. By lowering the tax rate for IT industry, I am rewarding people who want to take risk. At the same time, companies who have been employing people for a long time and producing useful goods & services don't see any extra reward in continuing with their business at the same pace even though there is untapped market potential. Another disadvantage is that you can lower the tax rate yet not gain any capital inflows because of huge risks involved or because of lack of interest in the market opportunity. One such example can be the case of Micro Finance Institutions or Small Scale industries or Technology Start-ups etc..... The list goes on.
To have companies running in the above stated list, funds are required in large sums and govt cannot obviously have funds for all of them. And it cannot keep on raising taxes for higher revenues.
The basic problem that I am highlighting over here is the case of a govt that needs to have extra funds to carry out a number of its projects in its 5 year plans. One way is to fund them with taxes. The other way is to take loans. I propose a third way, i.e, seek equity participation of private sector in a compulsory way.
Lets assume that Corporate India pays 25% of its net profit as Tax to the govt. For simplicity's sake, govt. wants to focus primarily on building of Universities with world class research and this is the only focus of the govt. I suggest that the Govt, of India reduce the tax to 20% and charge 10% as Mandatory Equity Investment or Equity Convertible mandatory debentures. These form the capital of a new Special Purpose Vehicle whose sole objective is to invest in new Universities with Research as primary focus. Now, Govt can formulate a policy saying that 30% of the funds will be used directly by Govt. of India along with the loans it takes from nationalized banks / Treasury bills to directly build universities. The remaining 70% will be given as grants to Universities in exchange for Preferential shares / debentures that promise a minimum dividend / interest every year. The purpose of such a system is to ensure that the end entity (here it is the University) is legally bound to keep paying some money to the investor and hence has to be technically profit oriented and self sustainable. The SPV that invests or sets up the Universities will also be the collector of interests / dividends and makes the decisions for reinvesting those on a continuous basis as per its charter. The shares of this SPV are held in a pro-rate basis by the Companies who got the shares in exchange for the 10% Mandatory Equity Investment / Equity Convertible mandatory debentures. Now, the Govt should also list the shares of this SPV in all the Capital markets like BSE, NSE etc... so that the companies can trade these as normal securities. The issues of any lock in period or Taxation on Capital gain can be debated later.
The above approach of making Tax payers as an Equity owner in Self-sustainable ventures will have the following advantages:
- The Tax payer doesn't treat tax as an expense anymore. The company does see value in higher taxes as it is an investment
- The govt. can practically mop up extra funds without incurring any wrath from corporate side
- There is higher transparency and lower level of corruption in any program undertaken through such SPVs as these are legally bound to pay certain returns to their share holders and hence need to manage the business in a self sustainable way. And as the TAx payers are Preferential share owners with right to vote on certain issues, they can replace the management of the SPV and in this way the accountability of the management is maintained
- These SPVs are different from Public Sector Enterprises in the sense that the jobs in SPVs are equivalent to private jobs as Private players are the sole investors. These SPVs also have a profit motive and have some legal bindings to pay money to investors. Further, these SPVs donot come under the Govt as the govt is only involved in deciding the objective of the SPV at inception and it doesn't have any control on the operations
The above example of REducing corporate tax from 25% to 20% + 10% equity investment for a single focus can be expanded by the Govt. For instance, it can have 4 primary focus areas and this 10% is split into 4% for program A, 3% for program B, 2% for Program C and 1% for Program D. In this case, there will be 4 SPVs. Further, the govt can keep the # of programs fixed and change the programs every year to get funds for new programs.
Sunday, November 15, 2009
False Electoral promises
Everyone of us must have come across politicians making false electoral promises. And recently, we have also seen political parties making promises that can create a fiscal crisis if implemented. In an ideal democracy, this problem shouldn't arise as the electorate votes for the ideal candidate based on the information they have. Does this kind of democracy exist in India where majority of the population is literate only for the definition's sake? And most importantly, what is the role of the electorate in a real democracy?
India is a burning example of how corruption can be rampant if the democracy is not defined properly. Just because democracy allows anyone who has been voted to be the best option to represent people, it opens up innumerable options for any person who has the wherewithal to sway the electorate with money or power. This has clearly proved that illiterate / irresponsible electorate will result in the election of a corrupt / irresponsible person who has no intentions of fulfilling his promises or a person with the iron will to implement his promises without any concern for the larger good. And we are all silent witnesses to such "Elections".
To address this issue, a lot of NGOs are trying their level best to get the "None of the above" option in an election so that voters can say that they like none of the contestants. Election Commission has been trying to get hold of people who are resorting to electoral malpractices. In my view, even the "none" option doesn't work as long as the electorate has a short-term horizon and can be easily attracted by money / liquor / false promises. Does this mean that the country has to be a silent witness to false electoral promises? The answer is a resounding "NO".
The essence of democracy is to let the people choose the right candidate. But, it doesn't mean providing unrestricted options to public. The solution is an autonomous body on the lines of Election commission comprising bureaucrats who are selected based on an objective selection process and not by nominations. The evaluation committee for such an interview should be elected by the applicants only from people who have applied for that position. This body should have the responsibilities of Evaluating manifestos, disqualifying potentially disastrous promises and filing & fighting legal cases against elected representatives who haven't fulfilled their electoral promises.
- The Autonomous body should create a 5 year plan for the govt budget and finances based on the current state of affairs and economic scenario before the election nominations are invited. This plan should be submitted to the President of India, Governor of concerned state, Chief justice of India and Chief Justice of concerned state. The objective is to arrive at an unbiased view of the sate of finances for the next 5 years. These things shouldn't be opened before the nominations are filed. After the nominations are filed, these should be made public.
- Ask the Election contestants who are independents to submit their manifestos with a detailed plan of execution, expected budget, funding plan and risk analysis. The Plan should be evaluated for feasibility and potential impact on the Treasury along with a Cost-benefit analysis based on the earlier analysis carried out by the autonomous body. And a grade has to be assigned. In cases of infeasibility or low benefits, the mainfesto should be deemed invalid and the nomination cancelled.
- In case of people contesting on party tickets, the party should submit a pro forma state budget highlighting the key revenues and expenditures for the next 5 years. This should show the impact of thier manifesto. Now a cost benefit analysis should be done by the autonomous body based on their earlier analysis. In case the manifesto results in deterioration of state of finances, the manifesto should be rejected.
- All the parties / candidates with approved manifestos can contest the elections. Those whose manifestos have been rejected can appeal and the appeal tribunal will give out a judgement with in a month. Only after the appeal results are out, can the elections be conducted.
-Apart from the above stated responsiility of disqualifying people making costly promises or infeasible solutions, the body also has a responsibility of filing a case of Fraud against the Elected representatives who haven't fulfilled their promises made in the election campaing. It is also the duty of the body to fight the case legally.
Such an autonomous supervisor will tackle the problem of False / Infeasible promises... As I have said, this is an ideal solution!
As with any solution, creation of such an autonomous supervisor has its own pitfalls. The bureaucrats can misuse the power they have if they are corrupt themselves. This can be controlled to an extent if they are kept under constant surveillance by Central intelligence departments + intelligence departments of states ruled by different political parties. This will address the conflict of interest to an extent. Another way of curbing this is by making sure that no bureaucrat is in the body for more than 3 years and they take up the job as their last assignment. This will also control conflict of interest among the bureaucrats.
India is a burning example of how corruption can be rampant if the democracy is not defined properly. Just because democracy allows anyone who has been voted to be the best option to represent people, it opens up innumerable options for any person who has the wherewithal to sway the electorate with money or power. This has clearly proved that illiterate / irresponsible electorate will result in the election of a corrupt / irresponsible person who has no intentions of fulfilling his promises or a person with the iron will to implement his promises without any concern for the larger good. And we are all silent witnesses to such "Elections".
To address this issue, a lot of NGOs are trying their level best to get the "None of the above" option in an election so that voters can say that they like none of the contestants. Election Commission has been trying to get hold of people who are resorting to electoral malpractices. In my view, even the "none" option doesn't work as long as the electorate has a short-term horizon and can be easily attracted by money / liquor / false promises. Does this mean that the country has to be a silent witness to false electoral promises? The answer is a resounding "NO".
The essence of democracy is to let the people choose the right candidate. But, it doesn't mean providing unrestricted options to public. The solution is an autonomous body on the lines of Election commission comprising bureaucrats who are selected based on an objective selection process and not by nominations. The evaluation committee for such an interview should be elected by the applicants only from people who have applied for that position. This body should have the responsibilities of Evaluating manifestos, disqualifying potentially disastrous promises and filing & fighting legal cases against elected representatives who haven't fulfilled their electoral promises.
- The Autonomous body should create a 5 year plan for the govt budget and finances based on the current state of affairs and economic scenario before the election nominations are invited. This plan should be submitted to the President of India, Governor of concerned state, Chief justice of India and Chief Justice of concerned state. The objective is to arrive at an unbiased view of the sate of finances for the next 5 years. These things shouldn't be opened before the nominations are filed. After the nominations are filed, these should be made public.
- Ask the Election contestants who are independents to submit their manifestos with a detailed plan of execution, expected budget, funding plan and risk analysis. The Plan should be evaluated for feasibility and potential impact on the Treasury along with a Cost-benefit analysis based on the earlier analysis carried out by the autonomous body. And a grade has to be assigned. In cases of infeasibility or low benefits, the mainfesto should be deemed invalid and the nomination cancelled.
- In case of people contesting on party tickets, the party should submit a pro forma state budget highlighting the key revenues and expenditures for the next 5 years. This should show the impact of thier manifesto. Now a cost benefit analysis should be done by the autonomous body based on their earlier analysis. In case the manifesto results in deterioration of state of finances, the manifesto should be rejected.
- All the parties / candidates with approved manifestos can contest the elections. Those whose manifestos have been rejected can appeal and the appeal tribunal will give out a judgement with in a month. Only after the appeal results are out, can the elections be conducted.
-Apart from the above stated responsiility of disqualifying people making costly promises or infeasible solutions, the body also has a responsibility of filing a case of Fraud against the Elected representatives who haven't fulfilled their promises made in the election campaing. It is also the duty of the body to fight the case legally.
Such an autonomous supervisor will tackle the problem of False / Infeasible promises... As I have said, this is an ideal solution!
As with any solution, creation of such an autonomous supervisor has its own pitfalls. The bureaucrats can misuse the power they have if they are corrupt themselves. This can be controlled to an extent if they are kept under constant surveillance by Central intelligence departments + intelligence departments of states ruled by different political parties. This will address the conflict of interest to an extent. Another way of curbing this is by making sure that no bureaucrat is in the body for more than 3 years and they take up the job as their last assignment. This will also control conflict of interest among the bureaucrats.
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