Strategy Wall - February 2018 Edition-The Strategy & Consulting Club | IIM Rohtak

c i s a B l a s r e v i Un and the e m o c In World

INDIAN INSTITUTE OF MANAGEMENT ROHTAK

Ar t i cl es

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Articles Universal Basic Income and the World Ankit Bhatia, IIFT Delhi

Article of the Month The world at this juncture seems pretty dissatisfied with itself. Wherever we look, we see people working away and trying to make ends meet. But more often than not, people are still not being able to do so.

Further, when one asks around regarding the satisfaction in people’s lives, we are quite likely to get a disheartening answer.

So, what is amiss from our lives? Is it the money? Is it passion? Or, Is it the lack of interest in our day to day jobs?

To answer these questions, we must ask ourselves an old question. One that has long been forgotten, why was money created?

The answer seems so easy that no one even cares about it anymore.

Money had been created as a method to make the barter system easier for us.

Somewhere along the line, the barter system was swept aside and money became an end in itself. Not something everyone realized, was it? Money became the object of ultimate desire instead of a means to an end. Money owns the world today.

Socialists like Karl Marx have advocated for equality for all. Marx believed that people should have access to quality healthcare, education and social security with the burden falling on the government, but practically speaking, this is not a feasible concept.

Then there are the Capitalists. Those who advocate for “every man for himself” and “profit as the main motive” This has led to a “dog-eat-dog” world where people are forced to strain themselves to make themselves valuable to their firms. There

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might be good monetary compensation in capitalism, but people don’t really get to live their lives. There are people in between these two extremes too, the Socialist Capitalists of the likes of Mr. Jamsetji Nusserwanji Tata, the founder of the Tata Group. He felt that the motive of an enterprise isn’t just earning profits but giving back to the society as well.

This is one approach that can be followed by companies, but then a question pops up, will people really be needed to do a lot of jobs in the future?There will be a lot of jobs that people will keep doing, but a vast majority of jobs will be lost in the coming times. Machines, both software and hardware, are developing at a stupendous rate and automation is touching lives of almost every single individual, one way or the other at this very moment. This trend is bound to accelerate even further and once ‘Artificial Intelligence (AI)’ reaches a certain level of understanding and knowledge, called “self-awareness” or “criticality”, there will be no stopping it. AI will take care of a lot of developmental and creative jobs on its own. People will be inherently required to do a lot less as technology develops and time passes.

But, the world, as yet, hasn’t matured enough to realize this in all its gravity.

Today, people without jobs feel restless and ostracized from society. They don’t get the respect that a working professional gets.

This kind of societal pressure also creates destructive tendencies in people. Had they been granted a Universal Basic Income,

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they might not have developed such an aggressive and objectionable behavior, but then, this concept is just that, a concept that hasn’t materialized yet.

Way back in the 1970s Canada had tried a program to offer guaranteed annual income to people, called “Mincome” but the project was scrapped subsequently. Another study was conducted in California in June 2016 on a small scale to research the impact of UBI. Countries like Switzerland, Sweden, Finland and other developed countries with very high standards of living have been debating over the implementation of UBI. The Swiss referendum of June 2016 got 23% votes in favour of implementation of Universal Basic Income of 2500 USD for all those people who aren’t currently working.

Critics and sceptics might even say that this additional flow of money in the economy will stoke an upward inflationary trend. For this, we can take the example of Sweden and Norway, two of the world’s most “Happy” countries, to see the kind of taxes people pay here and compare it with the percentage of people who pay taxes in other countries. Almost 96% of working people in Sweden pay taxes. The number stands at around 90% for Norway. In contrast, India and China have an abysmally low number of taxpayers at just 7% and 9% of their working populations respectively. The differences between these two worlds on

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our planet are quite apparent in the quality of life and society at large. Thus, we can say quite confidently that the threat of inflation can be eliminated just by broadening the tax compliance in countries. Tax rates won’t even have to be raised to provide funds for UBI. And if past trends are an indication, tax compliance broadens with development and with time. So these countries’ tax income has a lot of scope of increase and that will be used for the distribution of wealth and facilities to all citizens.

An important insight comes out of the result of the Swiss referendum. People are beginning to believe that this idea of providing a guaranteed income can be good. But the Relatively low knowledge of its actual impact on society has been holding back people and governments from implementing UBI. It is high time that money be realized as the means that it is and not as the ultimate objective. Over time, the development of countries will uplift the living standards of billions of people.

Through better research and studies, we will understand and perhaps apply Universal Basic Income to improve the lives of everyone.

This might not happen in the short term, but in the long term there is no denying the fact that Universal Basic Income can provide people the means to spend on daily needs and live life in the real sense of the word, while the machines hopefully take care of the rest.

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Venezuela Debt Crisis: A threat to stability By: Apeksha Tejwani, KJ SIMSR In the twentieth century, the discovery of large oil deposits in Venezuela remodeled its economy which stimulated an economic boom. In 1970, Venezuela became the richest country in Latin America with the highest GDP per capita, and one amongst the twenty richest countries in the world.

Venezuelan employees enjoyed high wages in Latin America and the economy was flourishing.

Today the country has been the poorest performer in terms of growth of GDP per capita. As per IMF figures, in 2016, the country had a negative rate of growth of minus eight percent, an inflation rate of 481 percent and an unemployment rate of seventeen percent. Shortages of food and medicines are extreme. Venezuelans suffer from malnutrition and diseases as they do

concern of Venezuelans throughout the crisis. Around 27,875 homicides were committed in Venezuela in 2015. To make things worse, there exist high corruption rates. Transparency International currently ranks Venezuela as the eighth most corrupt nation in the world

not have access to food and medicine owing to hyperinflation.

What factors bought such a decay in the Venezuelan economy?

Venezuela depends heavily solely on one sector i.e. its oil reserves. It has the largest

According to the New Yorker magazine, Venezuela has, "the world’s highest violent-crime rate". Rising violent crime, especially murder, has been the biggest The Strategy and Consulting Club

oil reserves in the world. Oil revenue has supported Venezuela's economy for years.

During the presidency of Victor Hugo Chavez, the price of oil soared high. The IIM Rohtak

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billions of dollars in revenue were used in

Venezuelan firms to continue

social agendas and food subsidies. The

manufacturing products, leading to a

funding of these programmes was done by

shortage. The government decided to

taking huge loans from the international

import goods from abroad by using oil

market. To prevent people from adopting

money.

the currency as dollars, Chavez restricted the access to dollars and fixed exchange rates. Soon it became unprofitable for

Oil prices have been falling since 2014,

not been enough to purchase basic goods

which has crippled the economic system,

that cost a lot more, resulting in

making it impossible to keep up with price

hyperinflation.

controls that existed during the prosperous years. The inability to pay for imports with bolivars as well as the decline in oil

The debt crisis

revenues has led to a shortage of goods.

The government is running out of money

The state has tried to set their prices,

and is unable to repay its high debts.

however, the consequence is that goods

According to the central bank of

have disappeared from shops and ended up

Venezuela, the foreign debt of the

in the black market, overpriced. The

Venezuelan state is split into:

government has also increased the supply of currency, as the cash in circulation has The Strategy and Consulting Club

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•

Public debt: it represents 55th of the

comprehensive swap for longer-term

total and is what's owed in terms of

claims, however, this might do very little

domestic and foreign debt bonds, treasury

to alleviate the chronic issues. Maturity

bills and bank loans.

extensions are unlikely to turn in new

•

private cash. These challenges can

PDVSA's debt: it's the Venezuelan

state-owned oil and natural gas company.

It represents 21% of the total debt

eventually result in default. however whether through a stubborn disposition to simply accept this reality, or just delay in

•

Foreign debt: accounts for 15% of total

the face of powerful political and

debt, funding obtained from China, Russia,

economic pressures, the government has

etc.

shown a powerful commitment to pay on

•

debt as long as they can.

CADIVI's debt: it's the Venezuelan

government body that administers legal

The Trump administration has imposed

currency exchange in Venezuela,

tough sanctions against the Venezuelan

representing 9% of the debt.

government. These sanctions, limit the

In November 2017 the economist

ability of the Venezuelan government to

estimated Venezuela's debt at US$105

issue new debt for money or in exchange

billion and its reserves at US$10 billion.

for existing debt, cutting the regime off from international markets and creating default more likely. Despite the increasingly hostile treatment, America has remained the highest importer of Venezuelan crude. A default might disrupt supply, resulting in shortages within the United States of America and a spike in worldwide energy prices.

Source: the economist President Nicolas Maduro, on November The government had payments looming in

2, 2017, proclaimed a “refinancing and

October and November 2017, and again in

restructuring” of the country’s overseas

2018. the government continues to explore

bonds, worth about $105bn. This step was

proposals to roll over maturing debt, either

taken at the cost of importing consumer

through a continuation of the deals of

goods that are at a shortage in the country.

recent months or through an additional The Strategy and Consulting Club

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However, if Venezuela stops paying its

Venezuela to repay it over a 10-year

debts, it might be risky, because PDVSA

period, with minimal repayments within

holds valuable property abroad. After a

the first six years, thereby helping

default, creditors might be able to impound

Venezuela meet its alternative debt

those resources. This may severely disrupt

payments.

PDVSA’s operations and wreak further mayhem on the Venezuelan economy.

Moreover, continuous defaults would seemingly make countries less willing to do business with Venezuela, decreasing its exports, and exasperating shortages of food and medication and creating further issues for its all-important refining industry, which is already tottered by under-investment.

If the government pursues smart economic policies, it might service the debts within a number of years. The country needs to develop other sources of income and decrease the economy’s dependence on oil.

Moreover, getting things on track for the Venezuelan government would need coordination and cooperation among major powers — the United States, China, and Russia, along with the support of G20.

On November 15, 2017, Russia agreed to restructure $3.15bn of debt and permit

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Strategies to Manage Disruptions in Business Shreyans Jain,IIM Lucknow “Artificial intelligence will drive human race. It will be debated whether there will be job left or not. But experts say that there is huge possibility of job creation through AI. We need to create environment for digital growth.”

Shri Narendra Modi, Hon’ble Prime Minister of India Introduction Disruptive innovations in technologies have unleashed what may be termed as the Fourth Industrial Revolution leading to transformation of consumer lifestyle and unlocking of value for businesses at an unprecedented scale. It has fuelled the emergence of business models with structural cost advantages that are offering solutions that are often simpler, cheaper, or more convenient for customers. This has

In such a scenario, it is becoming increasingly difficult and complex to define the rules of the game at the workplace.

Therefore, it is imperative for businesses, governments and individuals to be prepared for possible, even seemingly unlikely, outcomes if they are to overcome their The Strategy and Consulting Club

led to a paradigm shift in the current phase with the maturity peaks of Big Data analytics, Artificial Intelligence and the Internet of Things coming together to bring about a “combinatorial” effect - the capability of technologies working in tandem far exceed their capabilities when deployed separately.

Exhibit 1: Evolution of Digital Technologies

organisational and human resource challenges. Lack of strategic preparedness can make businesses vulnerable to unprecedented disruption and upheaval, and fracture their mandate to attract and retain employees, customers and other stakeholders.

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According to a World Bank research, automation threatens 69% of the jobs in India, while it’s 77% in China. India’s IT services industry is set to lose 6.4 lakh lowskilled positions to automation by 2021, according to U.S. based HfS Research.

There is, however, an upside to these disruptions that could help create a new business paradigm by allowing individuals to engage in high-order thinking and decision-making, and create vast reservoirs of information, skills and financing. This paper attempts to analyse the threat of disruption in writing the obituary of contemporary businesses and explore a few strategies to manage disruptions.

The Challenge of Disruption Every industrial revolution that has occurred in the past has opened a plethora of opportunities for individuals as well as organizations. What, however, differs now is the pace of change which is much faster than ever before. While previous industrial revolutions have overhauled our world at a linear pace, the current disruption we find ourselves in – the Fourth Industrial Revolution, as described by the World Economic Forum – is evolving exponentially. Thus, it is important here to pause and acknowledge a few examples from the pre-disruption era that provide the basis for contemporary and future developments.

For instance, the Indian Railway Catering and Tourism Corporation (IRCTC), a Government of India enterprise with “Mini Ratna” Category I status, today has facilitated access to ticketing services by people who were traditionally out of reach for the financial system. The IRCTC portal executes several thousand simultaneous logins and requests and is at par with leading e-commerce websites in terms of the volume of traffic. By integrating The Strategy and Consulting Club

prepaid scratch cards and internet kiosks into its ecosystem, it has successfully brought people without any credit history into the financial mainstream and provided them ticketing services. Thus, disruptions of traditional businesses is a way of looking outside-in (“what do consumers want?”), rather than inside-out, (“which parts of our operations can we digitize?”). A majority of the organisations, however, have gone digital with the latter approach. In the process, they have essentially failed to appreciate the fact that due to low switching costs, consumers migrate to the next digital challenger, without a thought to the incumbents’ assortment of products and services that they never take consideration of.

There is thus, a need for certain value system that can guide stakeholders’ action and make the transition to the era of disruptions a smooth process. The concerned stakeholders need to brainstorm ideas that can sustain the wave of disruption and challenge the traditional business models. The new roles need to be defined in such a way that the employees are able to find fulfilment in work and achieve peak performance. For businesses wrestling with change and preparing for greater agility in the workplace, adaptability is essential for navigating the changes ahead. Exhibit 2 shows the findings of a PwC survey conducted to gauge the level of preparedness among 10,029 members of the general population based in China, Germany, India, the UK and the US.

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Exhibit 2: PricewaterhouseCoopers (PwC) Survey Findings

Strategies to Manage Disruptions in Business Clayton Christensen , the Harvard Business School professor, while espousing the theory of disruptive innovation, described it

When compared against traditional performance metrics, the characteristics of disruptive businesses, at least in their initial stages, can include lower gross margins, smaller target markets, and simpler products and services that may not appear as attractive as existing solutions. Because these lower tiers of the market offer lower gross margins, they are unattractive to other firms moving upward in the market, creating space at the bottom of the market for new disruptive competitors to emerge.

A three-pronged strategy should, therefore, be followed to manage disruptions in businesses:beating the emerging players The Strategy and Consulting Club

as a process by which a product or service takes root initially in simple applications at the bottom of a market and then relentlessly moves up market, eventually displacing established competitors. As organisations tend to innovate faster than their customers’ needs evolve, most of them eventually end up producing products or services that are either too sophisticated or too expensive for the customers in their market. Exhibit 3 shows that in order to achieve higher profitability, organisations pursue their “sustaining innovations” at the higher tiers of their markets and by doing so, they unwittingly open the door to “disruptive innovations” at the bottom of the market.

Exhibit 3: The Disruptive Innovation Model

that involves marshalling and aggressively investing in the new technology in an effort to control the technology as it improves in ways customers care about.

▪ joining the disruptors in which the incumbent player, instead of waging war, waits and sees if a market entrant’s innovation improves and becomes a potential competitive threat and accordingly acquires the entrant’s business and its set of products.

▪ waiting the disruptors out or outlasting them, that allows incumbent players to buy time and exploit their positions of leadership by investing value chain elements that are difficult to replicate.

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Exhibit 4 compares the targeted product performance or features, the targeted customers or markets, and the business model implications that each strategy entails.

Dimension Targeted performance of the product or service

Targeted customers or market application

Impact on the required business model (processes and cost structure)

Sustaining Innovations Results in performance improvement in attributes most valued by the industry’s mainstream customers. These improvements may be incremental or breakthrough in character.

The most attractive (i.e., profitable) customers in the mainstream markets who are willing to pay for improved performance.

Improves or maintains profit margins by exploiting the existing processes and cost structure, and making better use of current competitive advantages.

Conclusion A new wave of disruptions is threatening business models across the world. India is standing at the cusp of change where through convergence of innovation and technology and by leveraging the Jan DhanAadhar-Mobile (JAM) infrastructure set up by the government, it can unlock unprecedented value for its citizens.

By having the right models and architecture in place, organisations can quickly understand and operationalize emerging technologies without creating chaos in the system. Employees need to be equipped with the skills and adaptability that would help make a more flexible job environment an opportunity to shape their careers in satisfying instead of a threat to their livelihoods and well-being. The regulators The Strategy and Consulting Club

Exhibit 4: Distinguishing Characteristics of Disruptions

Low-end disruptions Technology yields products that are good enough along the traditional metrics of performance at the low end of the mainstream market.

Targets over-served customers in the low end of the mainstream market.

Utilizes a new operating and / or financial approach – a different combination of lower gross profit margins and higher asset utilization that can earn attractive returns at the discount prices required to win business at the low end of the market.

New Market Disruptions Results in lower performance in “traditional” attributes, but improved performance in new attributes – typically simplicity and convenience.

Targets nonconsumption: customers who historically lacked the money or skill to buy and use the product.

Business model must make money at lower price per unit sold, and at unit production volumes that initially will be small emerging market. Gross margin dollars per unit sold will be significantly lower.

and enforcement agencies have new paradigms to grapple with, but must be proactive so as not to stifle the growth of the organisations.

The transition to the world of disruptions is not going to be conflict free. But it can be eased to a considerable extent if all stakeholders play by the rules of the game to create value for the society without coming in conflict with law.

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Religion, Democracy and The Marginal Utility Pratikraj Patil, JBIMS

In India the choice could never be between chaos and stability but between manageable and unmanageable chaos, between humane and inhuman anarchy and between tolerable and intolerable disorder – Ashish Nandy.

Being a management student protectionism and xenophobia are the two words that daunt me. It is often said that xenophobia is an outcome of inferiority complex. So we ought to seek the reasons for these complexes. But the more petrifying aspect of our society lies in increasing religious differences and day in day out use of religious politics in our social conduct. This is the right time to ask ourselves, has India been reduced to be just a mere geographical expression?

It is said that it definitely takes more than history and culture to bring civilization. So let us just try to apply some science and some theories to it. Let’s consider The law of Diminishing marginal utility, it says that the additional benefit which a person derives from a given increase of his stock of a thing diminishes with every increase in the stock that he already has i.e. more you consume lesser it satisfies you. Human kind has been serviced by a product named “religion” over the years, we may have different variants of it, with different names prevalent in different geographies, though the essence remains the same and theories explaining almost the same things. But the very fact that even after consuming this product for years the utility of religion does not seem to be diminishing. Ideally according to law, its utility should tend become negligible but in fact more one asks for the service, more he/she finds it The Strategy and Consulting Club

satisfying People are practising religion more than their respective constitutions.

And then I realise the reason why the marginal utility doesn’t apply to this entity, the two prerequisites of the law – first says, while the total wants of a man are virtually unlimited, each single want is satiable. But for a diminutive human, the abstraction of religion makes one believe that even the most insatiable need or want can be satisfied. And we have evident proofs for it.

For example when doctors put in their best to save one’s life, they come out of operation theatre and say, “rest is in his hands” and we start believing that he – God, the creator of the religion can satisfy this need. And the second says, different goods or services are not perfect substitutes for each other, wherein lies the conflict – people tend to believe that this entity named religion is substitutable, people believe that a particular religion they belong to can substitute for every other religion around and hence try to impose it on the splinters, and if can’t impose it then confrontationally advocate it.

May be the law of diminishing marginal utility is applicable to Democracy. As the first prerequisite says that each single want is satiable, it’s a notion amongst people that there are many needs and wants which a democratic government cannot satisfy and the second prerequisite that no products or services are perfect substitutes of each other is also applicable as all other forms of governance, be monarchy, be democracy, be communism or be autocracy have different ideologies, different origins, different means and different ends……

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Fintech-the messiah for financial access in India?

Shreya Ganguly, IIM Lucknow I.

Evolution of Fintech:

Fintech- a portmanteau of finance and

shoe-leather-costs, ease of transactions.

technology- represents emergence of a new

And this is where fintech has the biggest

branch of technology and services in

potential in future.

finance, including innovation in financial literacy & education, retail banking, investments and even cryptocurrencies.

Today, fintech is making inroads to mobile banking, mobile trading, online wallets and much more, thereby redefining financial architecture.

While these innovative services have disrupted the financial world by including more participants in the money sector, there

Fintech, telecommunication and banking

is still an untapped portion of the world

institutions are thus working hand-in-hand

population

to create mobile-payment and micro-

that

remain

unbanked

or

underbanked. As per the World-Bank

lending-facilities

report, around 2-bn people worldwide don’t

underbanked users. Mobile applications

use formal financial services and >50% of

like China’s AliPay and India’s PayTM,

adults in the poorest households are

created to foster financial inclusiveness,

unbanked, mainly due to their distrust,

have recently seen phenomenal growth,

limited reach of financial institutions, high

serving 450 million and 122 million users

for

financially-

in 2016, respectively.

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II.

Future Financial Growth:

Given the huge opportunity that fintech provides, the GoI has been promoting financial inclusion for a long time now, with policy-initiatives like Aadhar, UPI, Demonetisation, and smart-cities. One of

80% of Indian transactions still happen by cash whereas it’s 20% in developed countries. There is wide lack of proper supply of credit-lines in lending sector in India,

over-dependence

on

collateral

making the problem worse. One of the

the most ambitious projects is ‘India Stack

reasons is the absence of proper credit

Project’ which aims to bring together data

history and financial transaction record for

like Aadhar, KYC, digital-locker-system and UPI to a unified platform.

a prospective borrower. This problem can be solved with newer data analytics techniques, which use the information from

While banks are laden with the problems of

social media, bill payment history etc. The

the stressed assets, PayTM has received an

transaction value of Indian fintech sector is

investment of $9000 crore in May,2017.

estimated to reach $73 billion by 2020.

Venture-capitalist-backed investment in fintech increased to $5.4 billion in 2016

III.

New Financial Architecture:

from $4.5 billion in 2015 in Asia. The RBI

The concentration of fintech revolution in

has granted license of payment banks to 11

India is manifested from a recent EY report

entities including Airtel, PayTM etc.

stating India will become the second largest

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adopter of fintech in the world, with China

management solutions, advisory services

being

a

and improved operating models are likely

PricewaterhouseCoopers research, almost

to become the talk-of-the-future. It is the

all parts of financial sector including

quite likely that business models of

consumer banking, fund transfer and

financial sectors will evolve from debt-

payments,

wealth

based models to equity-based models. In

management etc. are likely to be disrupted

fact, the survey predicts that the Indian

by fintech over the next five years, with

banking industry would become the third

consumer banking showing the highest

largest domestic banking sector by 2050, if

disruption. The most promising fintech

supplemented well by fintech.

the

biggest.

According

investment

and

to

technology is undoubtedly the block-chain.

Artificial

intelligence

based

analytics

solutions, along with automated portfolio

cryptographic securities. Again, both the EFFECTS OF BLOCKCHAINS IN THE FINANCIAL SECTOR

national and private banks have, through ages, found it unprofitable to lend to small and even, medium entrepreneurs. Fintech

Conventionally, transactions have always

entrepreneurs have used this as a golden

needed a third-hand-authentication in order

opportunity by introducing peer-to-peer

to be successfully completed which block-

lending and web-platforms to match

chains revolutionised, by providing special

lenders and borrowers at substantially low

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interest rates. Alternate lending

transactors, making transactions more

mechanisms like crowd funding which are

transparent.

very popular in the developed countries, are also set to become a trend in India.

Habitually,

brokers

and

As a result of internet, various online market

places

have

evolved

where

other

consumers can compare varied insurance

intermediaries played an important role in

policies and take decisions accordingly.

transacting between stock market and

Fintech

investors, which has led to several fraud

insurance-value-chain through automation-

transactions. Robotic advisory will make

driven-data with the help of AI, thereby not

transactions much more credible, thereby

only making operations optimum but also

increasing access to stock markets for daily

broaden the horizon of insurances, mostly

will

further

revolutionise

making them customised for consumers.

Fintech innovations have not only created a

micro finance institutions, back and middle

separate channel of financial access for the

offices of large and boutique investment

consumers

banks).

artificial

through

the

block-chains,

intelligence,

biometric

applications, robotic advisors, peer to peer

IV.

Safeguards

and

Regulation

Overarch:

lending, online platforms etc. buy have also expanded the boundaries of traditional

However, in spite of all the grandeur that

banks (both national and private including

Fintech promises to deliver, it faces a great threat in form of cyber-crimes. The impact

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of cyber-crimes extends to both monetary

According

and loss in reputation. Hence, fintech start-

Christopher Flowers “fintech” will most

ups will have to ensure that stringent and

probably jeopardise lives of investing-

efficient security measures are made

entrepreneurs because of “fundamental

against any potential security breaches to

strategic contradiction” that looms between

build and keep consumer-trust alive and

technology and finance. Technology boasts

strong.

of efficiency, adaptability and fast-pace

In the recent set of regulations passed by the RBI, wallet services are required to submit yearly systems audit-report which should cover

technology,

hardware

and

compliance systems of systems. The companies have to ensure that separate login is provided for prepaid-paymentinstrument (PPI) account and that it is not

to

renowned

investor

J.

while finance, especially lending, is slowmoving and time-consuming. The dispute here is that finance takes time to break into market and thus companies are always under tremendous pressure both from potential and existing investors to showcase the famous “hockey-stick” growth, making companies myopic in nature.

made part of access to other services

The biggest point of difference between

offered by the service or its associate

traditional payment methods and fintech is

company. Such steps should go a long way

the enormous amount of data-crunching the

to help make use of such technologies

later does, through which it has potential to

secure.

disrupt the entire finance sector. But

Cynics and big-name bankers are widely

investor-expectations

dispersed in their viewpoints about long

abandon

term effects of fintech. While some are

traditional-sales-mechanism that provide

certain that it is a trifle bubble, many have

growth at the fastest. This “growth- at-all-

trusted the revolution and have found their

costs” outlook has impending probability to

way to establishing start-ups. Advocates

destroy the industry-core, as thousands of

claim that fintech has the potential to re-

dollars are now being used for quick-

define the way every consumer spends,

growth

saves and invests their money, while the

efficiency. As pressure rises above their

opponents argue that they will soon fizz

heads, they become exposed to riskier

out, owing to lack of competitive edge and

decisions.

technology

instead

of

force in

them

to

favour

of

innovation

and

potential scale.

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Another challenge is the integration of

is also important to keep in mind how the

traditional banks and other incumbents with

Central Bank, as a regulator, keeps

fintech. While this step has the potential to

remaining

add security and interoperability across

developments by building a rainbow of

platforms, the former resists changes and

regulatory overarch of safety and fund

threats of all kinds and refuses to integrate

usage. Fintech has already become one of

fintech into their business model, which

the hottest financial buzzwords and it does

leaves the fintech companies with only one

seem that with regulations addressing

possible option: venturing into long sales

issues of security and unprecedented

cycles. This has its own drawback as

growth, fintech will go a long way in

lengthy sales cycle makes it difficult to

promoting financial inclusion in India.

raise capital and gain visible transaction.

Only time will tell whether it can live up to

While fintech will go a long way in

vigilant

all

along

these

the expectations of trillions.

promoting financial inclusion in India, what

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Merger of Banks: Will they emerge or submerge?

Karthikeyan.M, , Great Lakes Institute of Management, Gurgaon

“Everybody complaints about the weather but nobody does anything about it.” The situation of banking Mark Twain once said,

today is very similar to this. Everybody derides banks and banker’s but nobody provides a solid, visionary solution. As someone who has worked close to three years as a credit officer in a reputed PSB, let me present some close quarter observations.

The debate about merger has been growing louder day by day because banks are gasping for breath with their poor capital position and government, as a single large shareholder, is forced to bear the brunt of this precariously positioned PSBs. Chakravyuh of modern banking: The factors which drove banks to this tumultuous, tattered capital position shall not be confined to just ‘NPA’. NPA is just a symptom and our attempts for a symptomatic cure is like treating cancer with pain killers. So, let us take a closer look at the deeper malaise.

1. Absence of mechanisms to insulate banks from self-built institutional pressures: In numerous occasions, bankers have faced threats and compulsions to lend to unsustainable businesses owing to political pressures. Keeping this apart, in a number of institutions, the higher management sets irrational targets that lead to ‘dangerous equilibrium’ of the credit portfolio. On a compelling note, the branch managers are even subtly notified that they might be The Strategy and Consulting Club

tasked elsewhere, if they fail to clinch the targets. Government has to evolve a framework to prevent not only the political pressures but also these institutional pressures. So, threatening a banker to exercise his/her discretionary lending power on one hand and also threatening him/her with vigilance investigations for a few unfortunate NPAs is like asking him to fly with his wings tied. Unless this is fixed, there is no scope for qualitative credit growth.

2. Perverted growth model of banks: In this critical phase, the growth model of banks should be one of strategically intensified and not senselessly diversified.

The answer to the losses owing to bad loans is not no loans but more loans and better loans. Instead of intensifying focusing on core banking, if banks divide their resources to sell peripheral financial products such as insurance, mutual funds, gold bonds etc., it means we are making a juggling joker out of a banker instead of a focused archer.

Merger might be a short-term reparation but not a long-term solution. Let us not fall prey to wrong assumptions such as a) Large banks have the inherent capacity to absorb other banks along with their self-generated NPA. This is evident from the fact that SBI’s net profit was ₹2,815 crores in March whereas the merged entity reported a loss of several crores. If this could happen to India’s largest lender, that too after merging with its sister organisations under the IIM Rohtak

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same management, then it means the strategy needs a revisit. b) The larger the bank, the stronger it is. We are aware that several small sized private banks such as IndusInd and KMB remain as strong players.

This is strongly opinionated by stalwarts like Vaidyanathan (IIMB).

Most importantly, the way we merge is

more important than merger itself.

Where a fine scalpel of a surgeon should be used, a bludgeon or battle-axe should not be. Myopic

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focus on the NPA situation alone should not drive consolidation of banks but rather the motive should be to energise the entire banking sector. This stimulates two powerful thoughts: 1. Merger between private and public sector banks ought to be thought of.

2. The thoughtful recommendations of Narasimhan committee in 1991 where he envisaged a three-tier banking structure (three large international banks, ten national banks, and many local banks) shall not be forgotten.

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INDIA’S FOREX RESERVES Nakerikanti Harish, IMI Kolkata

India’s Foreign Exchange reserves recently crossed US$ 400 billion for the first time in its history, in November 2017. India's foreign exchange reserves includes foreign currency assets like US $, EU’s euro, the British sterling pound, and the Japanese yen, SDRs, Gold and reserve tranche position (RTP). Forex reserves refers to money and the other assets like gold, RTP.etc., held by a central bank/Monetary authority of that country, such as the currency issued by the central bank, as well as the various bank reserves deposited with the central bank by the government and other financial institutions. Foreign exchange reserves play an important role in the component of balance of payments and a crucial element in the analysis of an economy's external position.

yearly basis depending on the country.

China is in the top position with US$ 3.1 trillion in its forex reserves as on 31st March 2017, followed by Japan and Switzerland in 2nd and 3rd place with reserves of US$ 1.23 trillion and US$ 730.4 billion respectively.

India ranks 10th with forex reserves of US$ 369.95 billion as on 31st March 2017. As per figure.1 there are 24 nations worldwide which have forex reserves of more than US$ 100 billion.

Worldwide, more than 100 countries maintain forex reserves and provide data to IMF on weekly, monthly, quarterly or

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1,03,352

1,05,697

1,11,985

1,16,245

1,21,806

1,31,446

1,43,489

1,43,492

1,51,734

1,63,444

1,78,704

1,80,869

1,94,467

2,59,638

3,69,955

3,70,111

3,75,302

3,95,548

3,97,907

4,38,426

5,08,657

7,30,407

12,30,330

31,02,764

FOREX RESERVE ASSETS AS ON 31ST MAR 2017 (US $ MILLIONS)

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In our India, the Reserve Bank of India Act set the legal provisions, necessary for governing the foreign exchange reserves.

RBI accumulates/disperses forex reserves by purchasing/selling from the authorized dealers whenever required from the open market operations.

In India, RBI releases reserves information every Friday. As per data release by RBI on 18th Feb 2018, India’s Foreign exchange reserves peaked at US$ 420 billion on 9th February 2018, of which US$ 394.6 billion was in the form of foreign currency assets, US$ 21.5 billion in the form of gold, US$ 1.5 billion in SDR’s and US$ 2 billion in reserve tranche position (RTP) in the IMF. Gold as a proportion of our reserves is relatively small with just 5%. After foreign currency assets, in our reserves gold is the ultimate currency in India. Gold had a

Country Name China Russia Brazil India South Africa Table - 1

significant role in paying for the imports during the 1991 crisis.

The increase in forex reserves in India in the last few years demonstrates the underlying strength of its balance of payments with increase in FDI, FII and NRI investments, particularly from 2014.

Reserves are always needed to ensure that a country meets its external obligations.

These include international payment obligations, including sovereign and commercial debts. Imports in India during the Jan 2018 stood at US$ 40.60 billion.

With the current level of forex reserves it can cover 10 months of imports easily.

In comparison with BRICS nations, India is at 4th place out of the 5 nations.

Please refer Table-1 for more details.

Forex Reserve As on 31st Mar 2017 (US $ Millions) 3,102,764 397,907 370,111 369,955 46,588 Source: data.imf.org

The Two important aspects of holding the high forex reserves are: 1) Benefits of holding high forex reserves 2) Forgoing the Opportunity cost by holding high forex reserves Benefits of holding high forex reserves One of the major benefits of holding high amount of forex reserves is it acts as a buffer during the forex market pressures and thereby it also helps to prevent the external crisis. In the global community for the emerging economies like India, Russia, The Strategy and Consulting Club

Brazil, ETC, holding higher levels of forex reserves provide assurance to them that, the external liability incurred by the particular nations will be repaid within time and also it helps in balancing the exchange rate when required.

In 1991, when India had faced its worst ever balance of payment crisis, we pledged 67 tons of gold to The Bank of England and the Union Bank of Switzerland and raised US $605 million to shore up its dwindling forex reserves, which were then barely enough to buy just two weeks of essential imports. India’s IIM Rohtak

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foreign exchange reserves were at US $1.2 billion in January 1991 which hardly equals to just 3 weeks of essential imports.

the end of November 2008. Fallout of the global crisis has been responsible for the decline of India’s forex reserves. The value of rupee against US $ 1 declined to Rs 48.66 in Oct 2008 from Rs 40.00 in April 2008.

The India rupee came under sharp pressure after the collapse of the Lehman Brothers in September 2008. The RBI has taken necessary steps in the domestic foreign exchange market aimed at reducing undue volatility of Indian rupee. Thereafter rupee has attained a measure of stability. The exchange rate was Rs. 51.2 per US dollar in March 2009. India’s high amount of forex reserves played a key role in balancing the exchange rate of Indian rupee

Since 2001, India has been maintaining a large amount of Forex reserves. As per figure 2, In 2001 Indian forex reserves stood at US$ 42 billion and currently it is US$ 420 billion, which indicates that it has increased roughly by 10 times over the course of 17 years. On the contrary, there is a major fall from 2008 to 2009, due to the 2008 global crisis.

During the 2008 crisis, India’s forex reserves fallen to US$ 247.7 billion at

India's Forex Resrves ( In US $ Millions) 4,50,000 4,00,000 3,50,000 3,00,000 2,50,000 2,00,000 1,50,000 1,00,000 50,000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Gold

RTP

Forgoing the Opportunity cost by holding high forex reserves Our Ex RBI governor, Dr. Raghuram Rajan once said that reserves cannot buy a country immunity from volatility in global currency markets and at best will prevent second round impacts of that volatility. He was quoted saying, The Strategy and Consulting Club

SDR

US $

Total

“Reserves are useful to have but they come at a cost”. By maintaining huge Forex reserves, India loses the opportunity cost.

India’s foreign exchange reserves are parked in US treasury bonds, which earn just one percent annual interest i.e., US$ 4 billion on US$ 400 billion reserves. But India has a total debt of US$ 1.20 trillion (RS. 75 Lac crore) including both internal IIM Rohtak

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debt and external debt. The annual interest outgo on this debt is US$ 87 billion (Rs. 5.23 lac crore) as per the 2017-18 Union budget. This means India is paying around

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6.5 - 7.5 % interest on its debts. So, by this we can say that India is paying more rate of interest on its debts than what its getting on its reserves.

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Is World War III already commenced?

Mayank Banka, IIM Rohtak

The earth has seen its two biggest war World War 1 and World War 2 in last century where many countries have suffered. We have come a long way. Last six decades the earth has become a very peaceful place where there is less war between countries. But a new war is beginning in different frontline. It has been said that next war will not be a conventional warfare but an economic one. This war will be fought with financial power, economic power, economic polies, at different international forums where power are concentrated in few hands. The target country is crippled economically.

Many countries have already become a target of economic warfare. Many developing countries and under developed countries are becoming target of rich and economically power countries.

Economic polies of countries are changing, and they are targeting few countries. Rich nations provides loans to these poor or economically backward countries in pretext of providing it for their economic development. These debts are so huge that their interest cost could not be bared by these countries. Once the target country defaults in payment on the loans, they must hand over their strategic infrastructure like airport, port to debt providing country. Their policies will be changed in favour to loan providing country.

Developed countries has target many developing and under developed countries by providing loans for infrastructure project. These infrastructure projects are link to their own ambitious project which will cover many developing and under developed countries. People working on these infrastructure projects will mostly from the developed country which is providing loan.

There will be low employment generation in the target country. These countries will actually not benefit but they will be digging their own grave by taking loans. Countries like Pakistan, Maldives, Sir Lanka, Mongolia, Tajikistan, Kyrgyzstan have already become a target and they are facing huge problem in servicing their debt.

Many developed countries are endorsing low tariff and free trade policies but they themselves are not abiding to it. They are forcing many developing and under developed countries to reduce their tariff rates. Using the economic power at various international forums and groups, poor countries suffer.

The economic warfare has been started. It is more dreadful.

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The Strategy and Consulting Club Indian Institute of Management Rohtak Team Members Ijas MC Lavesh Bhadada Mayank Banka Nishant Garg Varun Parvathaneni Taslish Chadha

Disclaimer: The views and opinions expressed in this magazine are those of the authors and do not necessarily reflect the opinion of the stakeholders of IIM Rohtak

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