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presents
April 2021 Vol 4 Issue 14
Our best read - CRYPTOCURRENCY: FROM BULL TO BEAR
Special Mention: SPAC- The way forward & Nova Modus Vivendi or 'a new way of life': Hedge cities explained
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INDEX
S.No.
Article
Page No.
1
CRYPTOCURRENCY: FROM BULL TO BEAR
3
2
SPAC- The way forward
6
3
Nova Modus Vivendi or 'a new way of life' : Hedge cities explained
10
4
SPACs – the new frenzy in global capital markets!
12
5
The 2007-2008 Financial Crisis
15
6
Impact of Digital Payments on Indian Economy
22
7
The Greece Debt Crisis
29
8
MICROFINANCE
35
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CRYPTOCURRENCY: FROM BULL TO BEAR By: Suraj Jaju (FORE School of Management, New Delhi) Origin How cryptocurrency came into existence? The Central bank has the power of increasing or decreasing the inflation rate. It implies that they have the power to print money and control the buying power. Let say Mr. Kabir, a retired person and completely relies on his savings and has no other source of income. Now, the government announced that they have increased the inflation rate. This decreased the purchasing power of Mr. Kabir. He became poorer overnight. People identified that their investments are highly dependent on government decisions. This becomes the fundamental problem. So, people demanded there should be a currency that is not regulated by the government. But if a currency is not regulated then how could one make transactions. That is the reason why people demanded a digital currency. The main problem with digital currency was that it can be duplicated. Anyone in the world can create a similar currency. Here comes the cryptocurrency for the rescue. Crypto means to encrypt and make each currency unique. It cannot be copied and duplicated. Therefore, solving three major problems. 1. Cryptocurrencies are not regulated by the government; thus, it became people’s currency. The government cannot increase or decrease its supply just by printing it more. 2. As it is digital, transactions can be made easily. 3. It is very difficult to steal. Now the big question comes that whether cryptocurrency is good or bad? But before that is it really a currency?
Source: google images Stability Stability is the basic feature of a currency. let say today you go to a shop to buy a pen costing Rs.10. The next day, a week later or a month later it will cost Rs. 10 only. This is because INR is stable in nature. But when we use crypto as a currency, it will not cost the same. A seller cannot guarantee that a pen that is costing 1 Bitcoin (BTC) today will cost the same a day later. The reason being Cryptocurrencies are highly volatile. Daily Transactions
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The next problem is the use of cryptos in day-to-day transactions. Let say you have 1 BTC today, you have two options. First, either to use it to buy some groceries for your dinner or to not use it. You decide to spend it on groceries. And an hour later BTC rises 5%. Now, you regret that you should have waited for an hour before spending. But when it comes to INR you will spend and even after an hour or a day later you will not regret it. The reason being that INR is stable, and it will neither appreciate nor depreciate faster. This implies that a person will never spend BTC and hold it for capital gain.
Investment opportunity in Cryptos Another thing to highlight here is whether cryptocurrencies are investable or not? If we assume BTC is a currency. As an investor, you can invest in stocks, bonds, etc. But when was the last time you invested in USD, INR, EUR, etc.? The answer is never. The reason being one can park their money in currency but cannot invest in it. We use currency as an instrument to make transactions. So, this proves that our assumption of BTC as a currency is wrong.
Source: google images Which type of currency is a Bitcoin? Currencies are of 2 types. First, the that have intrinsic value and the second that are backed. Let say you have gold, and you are using it as legal tender. But then one-day government announced that they are going to ban gold for transactions. So, what could be done with the gold you have now. It can be used as a piece of jewellery, gold electric wires, crockeries, and cutleries, etc. This means gold has an intrinsic value. Although its price will fall it can be used in other ways. Now, if the government decides to ban cryptocurrencies. In what other ways it can be used. Probably none. This proves that cryptocurrency does not have an intrinsic value. INR as Fiat money. A few decades back, governments used to back the print money with gold. But now it is fiat money also known as decree money. This means the government has declared that INR is backed by the Indian government. But BTC is backed by neither government nor any person. This proves that Cryptocurrencies neither have an intrinsic value nor backed. It only has a perceived value that means it is all emotional. Cryptocurrency is not a real currency.
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Conclusion If the government cannot regulate the currency, then it cannot control the inflation or deflation rates. Whenever there will be inflation it will turn into hyperinflation. And It will be a disaster for the world. So, the answer is crystal clear that countries will never accept cryptos as a reserve currency.
Source: bbc.co.uk Lastly, I would like to talk about Elon Musk's investment in BTC. His investment does not guarantee that BTC will become stable in the future and will be used as a legal tender. Warren Buffett once said, “Public opinion is not a substitute of thought”. One must do their analysis and apply understanding before taking a decision.
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SPAC- The way forward By: Peetambaram Aiswarya (Institute of Public Enterprise PGDM) SPECIAL PURPOSE ACQUISITION COMPANY Special Purpose Acquisition Companies are the black cheque or cash shell companies with no business operations. They usually acquire a target company of a specific sector within two years. SPAC's are lead by sponsors or investors with expertise in a particular industry. David Nussbaum created SPAC in 1993.
HOW DOES SPAC OPERATE? Firstly SPAC is formed by a group of qualified sponsors who can influence the retail investors. It raises money through Initial Public Offering(IPO) to acquire an operating company. A retail investor is allowed to invest $6 to $10. The money SPACs raise in an IPO is placed in an interestbearing trust or escrow account. Its main aim is to acquire a target company within two years or results in liquidation. There are two cases: i) Approval of shareholders ii)Denial of shareholders Approval of shareholders: If 80 % of shareholders render support, then the SPAC advances to take over the target. Denial of shareholders: If more than 20 % of shareholders reject the acquisition of the target company, then the SPAC ends in liquidation.
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In the earlier cases, if the shareholders are not impressed with the target company they, get their capital back with interest for two years. EXAMPLES Terrapin 3 Acquisition Corp (TRTL), a NASDAQ-listed SPAC, acquired Yatra. TRTL was listed on the New York Stock Exchange in 2014, with Deutsche Bank as their underwriter. Through a reverse merger with Silver Eagle Acquisition Corp, a SPAC, Videocon DTH was listed on the NASDAQ. In 2014, Silver Eagle went public, with Deutsche Bank as their underwriter. TRENDS IN SPAC DOMAIN: The term SPAC originated in the 1990s. In the US, the initial SPAC is Information Systems Acquisition Corp in the year 1993. In the mid-2000s, SPAC activity picks up 68 SPACs issued between 2004-2006, raising USD 5.2 billion. Later, in 2007, Pan-European Hotel Acquisition Company is the first SPAC listed on the Euronext Amsterdam exchange. In 2009, SPAC activity drops during the financial crisis. Further, in 2014, SPACs see a resurgence in activity, raising USD 1.8 billion across 12 IPOs in the US. In 2020, amid the covid-19 pandemic, a record listing of SPACs globally got witnessed.
SPAC vs IPO: • • •
Speed: SPAC takes 18-24 months, IPO takes years to complete the process. Regulations: SPACs can identify themselves as SPACs 'without law', but not ‘outside of the law’. When related to traditional IPO, SPACs possess fewer regulatory hurdles. Historical data: SPACs are blank check companies with no historical operations whereas, traditional IPO requires a financial history of approximately three years.
SPAC IN INDIA: In India, companies operate public through the IPO process. They prefer to go public to improve the market capital. Liquidation is their intention. SPAC takes lesser time to complete the acquisition and go public in comparison to IPO lures investors.
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REGULATIONS IN INDIA:
According to the Companies Act, A registrar can remove a firms name from the register of companies if it has failed to commence its business within one year of its incorporation. SEBI introduces the minimum acceptability criteria for companies to go public as follows: • • • •
The net tangible asset of minimum INR 3 crore in each of the preceding three years. Minimum average consolidated pre-tax operating profit of INR 15 crore during any three of the last five years. The net worth about at least INR 1 crore in each of the preceding three years. National Stock Exchange and Bombay Stock Exchange comply with the SEBI rules.
TAXATION: In India, any capital gain earned by an individual is taxable. Foreign SPACs which acquire an Indian business ensure the acquisition of share capital of the company in cash exchange to its shares. In such a case, capital gain is in the hands of an individual. If SPAC takes birth in India, the acquisition is among two Indian companies, i.e: the SPAC and the target company. In this situation, the tax is neutral. To avoid further litigation it is better to introduce a set of rules under the income tax act for SPAC. The important filings for a SPAC are the S-1 and the 8-k filing. S-1 filing is done after the announcement of the formation of SPAC and its acquisition in a particular sector or industry. 8-K filing is done after the acquisition of the target company. However, every film has a villain. Blank check firms have a history of being involved in illegal activities. The identical situation can persist in SPACs. To implement SPAC in India, a collection of rules and regulations must be in place to ensure that no further infringements occur.
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REFERENCES: https://investmentu.com/spac-ipo/ https://www.123rf.com/photo_73596441_cartoon-of-a-businessman-pulling-his- hair-out-as-hesees-a-huge-book-of-new-regulations-.html https://fatjoe.com/google-trends/ https://www.123rf.com/photo_112353842_stock-vector-cartoon-a-businessman-paid-tax.html https://mnacritique.mergersindia.com/regulatory-challenges-special-purpose-acquisitioncompany-india/ https://corpgov.law.harvard.edu/2018/07/06/special-purpose-acquisition-companies-anintroduction/
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Nova Modus Vivendi or 'a new way of life' : Hedge cities explained By: Ayush Malhotra Having a house is a necessity for most people, a person may not possess a car or gold but one surely needs a place to live. Linking a house to it’s monetary value is not a problem, one should know the value of their house but it just doesn’t stop. Nowadays, the dominance of the financial sector on housing around the world is soaring and we are residing in a world of rapid consumerism where people are solely interested in maximising their wealth. The momentum however is eventually shifting towards the housing market in spite of the very fact that realestate is seldom considered a healthy investment. The concept of considering a house as a financial instrument has further given rise to a contagious phenomenon known as a 'hedge city' that can be a vital determinant as far as the global housing market is concerned. One may not know about this but there are a few cities around the world where investors from all parts of the world buy properties or land due to a number of reasons. The investors might want to park their resources at a place which is considered tranquil as far as the social structure and the political environment is considered. Investors also acquire land in other cities in order to hedge against climate change so that they possess a significant asset in a city which would not be affected in a drastic manner, these places are known as ‘Hedge cities’. This exercise however, drives the housing prices way beyond what an ordinary person can think of and it becomes strenuous for the people belonging to the middle and lower income group to afford a reasonable place to reside as the houses around them turn into these overvalued assets. Due to the element of unaffordability, borrowings take place and since there is always a certain kind of vagueness as far as the housing prices and income levels are to be extrapolated, the inability to pay back the loans results in the genesis of a debt trap along with a void which will always remain unfilled. London, Sydney, Hong Kong and Vancouver are a few cities that people have hedged on. A single apartment in London or Vancouver can cost you over 1.2 million USD. For example, Chinese investors have invested over 11 Billion USD in Vancouver city’s realestate market which implies that the Chinese elite are not certain about China being an ideal place to live in the future or even recently. In some parts of California like the Bay area, the prices are around 3500 USD/sq ft. It costs 1300 USD in Singapore and 2000 USD in Hong Kong to own one square feet of a house or maybe even less. All these costs depict a pattern, a pattern which is almost impossible to pass over and it is visible that people are looking to invest in places where the management is efficient and places that might be the next big thing when it comes to being, ‘the next silicon valley’ or ‘the next financial hub’. Obviously, these places would guarantee that more and more people would pour in, in the future which would also mean higher demand for houses and in turn, higher returns. The bottom line is, that it is not only about the rising prices but also about the limited growth in income levels over the years. If we look at England, the average price of a house has skyrocketed to 300 thousand GBP and the price has grown at a compounded rate of almost 9% annually but if
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we look at the income levels, the growth rate is not even 4% which is a concern. It is not only in the case of England but that is the case with a substantial number of states. A few solutions that can be implemented in order to stabilise this tumbling block are: •
There should be a few changes in the Foreclosure procedure of mortgages. Forceful evictions is something that has to be avoided at all costs. There should be a constant pursuit to know the ‘hows’ and ‘whys’ before evicting a person from his house. There could be a valid reason for the borrower not paying their mortgage and it should definitely be looked into.
•
Stricter regulation of the Housing sector which will include a separate act for consumer protection which will be regulated by a reformed, stronger authority dedicated to The Housing market which should be constantly regulating the debt accumulation of households and mortgage payments and collection of payments by the banking sector.
•
Price-ceiling on the housing prices is of paramount importance now, this can be done area wise,state-wise or country-wise although state-wise would be the best option as it would be under the state government and comparatively easier to regulate.
•
Incentives promoting debt accumulation like deductions in income tax due to mortgage interest needs to be revoked. Apart from all of this, a strong emphasis should be given to increasing rental housing and making it accessible with rules which would make lease agreements more flexible and affordable. There should be no or little incentives to nonresidents as far as acquiring land is considered, given that there is not enough housing for the residents.
•
Educating the general public about the housing market is equally important. People should be aware about the situation around them. In the long run, this education and awareness would enable the general people to act sensibly and analyse every financial aspect on their own. The government should specifically survey public land as well, for future building purposes because a lot of public land is often unoccupied and unused.
All of this just reminds me of a latin phrase ‘Cui Bono’ which means ‘Who actually benefits?”.
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SPACs – the new frenzy in global capital markets! By: Mitali Srivastava (KPMG India) SPACs or Special Purpose Acquisition Companies are increasingly becoming the preferred option for raising public funding from offshore markets. In their pursuit to raise capital and achieve liquidity for shareholders, companies are considering mergers with SPACs over the traditional IPO process. While SPACs have been in existence since 1990s, they have gained popularity much recently. This surge in the popularity of SPACs globally is driven by blue-chip private equity funds, high profile entrepreneurs and banks like Goldman Sachs and TPG Capital forming SPACs – offering a unique opportunity for start-ups who otherwise struggle to attract the conservative Indian retail investors. Overview of SPACs – What and Why? Special Purpose Acquisition Companies are blank check companies that raise capital through an IPO (Initial Public Offering) in order to complete a future acquisition of one or more unidentified operating companies (Target). SPACs are typically floated by experienced management teams including industry veterans and private equity / venture fund sponsors who leverage their expertise and reputation to raise capital via an IPO. Funds raised by a SPAC as part of the IPO are parked into an escrow account until the time SPAC identifies a Target for business combination (a.k.a deSPAC transaction). SPACs usually have up to 24 months to complete an acquisition and in case they fail to complete a deal in the stipulated time, they are liquidated and the money is returned to the investors. Post completion of the de-SPAC, the Target operating company gets merged with or acquired by the SPAC, thereby becoming a publicly traded company. This innovative approach of listing shares of the Target company by way of merger with SPAC in lieu of executing its own IPO offers potential advantages over the traditional IPO route. One of the most exciting feature of raising public funds through the SPAC route is the ability to leverage on future projections. Startups which typically report huge losses would have otherwise found it impossible to access the public markets based on their historical financial statements. Their valuations are primarily based on future projections which are not allowed to be reported in the traditional IPO route. Further, SPAC also offer advantages such as: • • • • • • •
Companies have access to capital even when market volatility limits liquidity; Lower transaction costs and quicker process to become a listed company; Valuation set by negotiation between Target and SPAC instead of book-building process; Ability to structure transaction including earn-outs and cash out to existing Promoters which otherwise are not available in the traditional IPO process; Opportunity for Target companies and its Promoters to partner with experienced SPAC team and deliver enhanced business value; Utilize expertise and network of SPAC founders to raise public capital from broader base of investors/ greater ease in capital raising vis-à-vis private vehicle; SPAC founders acquire ~20% of the SPAC size with nominal capital investment.
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Typical SPAC structure and de-SPAC process A typical SPAC capital structure consists of - public shares, public warrants, founder shares and founder warrants. Founders invest nominal capital at the time of formation of SPAC which typically translates to ~20% of the SPAC size. Balance ~80% stake is held by the public investors. Warrants give a right to the holder to acquire more shares of the SPAC at a pre-determined price at a later date. Investors who participate in the SPAC IPO are attracted to the opportunity to exercise the warrants so they can get more shares once the acquisition target is identified and the transaction closes. SPACs usually target companies about 2-4 times of the money raised through IPO. Hence, to close the deal, SPACs raise additional investments either through debt financing or through outside equity investors – more commonly known as PIPE transaction or Private Investment in Public Equity transaction. Most common de-SPAC transactions involve merger of the Target with SPAC. Approval from majority shareholders is required to approve a business combination. Public shareholders who elect to vote against the proposed deal are given an option to exit and liquidate their shares. Further, if 20% or more shareholders opt to liquidate their shares, SPAC is liquidated and money returned to the investors. Post approval, the Target gets merged with or acquired by the SPAC and detailed disclosures regarding the Target company are filed with the relevant Exchange. SPACs in the Indian context SPACs structure are a fairly alien concept in India. There are only about three precedents of Indian companies adopting the SPAC route – two concluded deals and one recently announced transaction by ReNew Power. A major regulatory drawback in India is the lack of focused laws for SPACs. While the overall intent of the Indian stock market watchdog SEBI, in the recent past, has been to allow overseas direct listings of Indian companies, statutory backing and detailed guidelines in this regard are still awaited. The current tax and regulatory framework needs to be amended suitably to facilitate SPAC structure. In light of this, SPAC structuring inter-alia, merits the following key considerations: • • • • •
De-SPAC transaction involving outbound merger of Indian company with overseas SPAC to comply with Cross Border Merger Regulations; Achieving tax neutrality for Indian company as Indian law accords tax benefits only to qualifying mergers; Optimize tax cost for Promoters as ordinary swap of shares likely to be taxable and to evaluate possible deferral of tax to the point of actual monetization; Mechanism for swap of shares to be carefully analyzed in view of FEMA regulations and need for any regulatory approval; Tax structuring for SPAC and its investors to ensure availability of full cost base for any future exit.
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Further, for any company looking to go public via SPAC route, one of the most important factor is its preparedness to operate as a public company as the De-SPAC transaction gets completed much quickly that the traditional book-building IPO process. The supply side of SPAC funding has been overwhelming in the past couple of years with more than USD 84 Billion being raised from SPACs in the US in 2020 alone. As all these billions of dollars are eying for suitable targets, Indian start-ups and businesses are set to be at the heart of the next SPAC wave backed by increased valuations. However, the success of SPACs structure in Indian sub-continent would depend heavily on the regulators’ outlook towards it considering the current India tax and legal framework is not so SPAC-friendly!
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The 2007-2008 Financial Crisis By: Swapnil Gupta (KJ Somaiya Institute of Management) The 2007-08 Financial Crisis also known as subprime mortgage crisis, impacted the liquidity of global financial market, originated in US resulted in collapse of US housing market. Several investment and commercial banks, insurance companies and saving and loan associations failed due to this; and precipitated as the worst economic downturn since the Great Depression (1929 – 1939). Causes Of The Crisis The central bank of US, Federal Reserve (Fed), anticipated a mild recession, began in 2001, hence federal funds rate reduced 11 times between May 2000 and Dec 2001, from 6.5% to 1.75%. This significant decrease allowed banks to increase consumer credit at a low prime rate (the interest rate, banks charge to their “prime,” or low-risk customers) and even welcomed “subprime,” or high-risk customers. Due to cheap credit the purchasing power of consumers increases which increased the demand of various commodities in the market, especially houses, as it was the dream of many Americans to buy own house at that time.
Due to changes in banking laws from 1980s, banks were allowed to offer to subprime customers mortgage loans that were structured with adjustable interest rates. Subprime homeowners could avoid high mortgage payments by refinancing, investing against their homes' increased value, or selling their homes for a profit and paying off their loans, as long as home prices continued to increase. If customer make defaults, then the property could be repossessed by the bank and sell it for more than the amount of the original loan. Due to that factor, many banks aggressively marketed subprime loans to customers with poor credit or few assets, knowing that those borrowers
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could not afford to repay the loans and often misleading them about the risks involved. As a result, the share of subprime mortgages among all home loans rose from around 2.5% to about 15% per year from the late 1990s to 2004–07.
Hundreds and thousands of subprime mortgages and other less-risky forms of consumer debt bundled together by banks and sold them (or pieces of them) in capital markets as securities (bonds) to other investors and banks. Bonds of mortgages became known as mortgage-backed securities, or MBSs, which entitled their purchasers to a share of the interest and principal payments on the underlying loans. To increase the bank’s liquidity and reduce the exposure to risky loans, selling subprime mortgages as MBSs was considered a good way by banks. While to diversify the portfolios and to earn handsome returns, investors and banks started buying MBSs excitedly. MBSs became quite popular as home prices continued their meteoric rise around 200405, hence their prices in capital markets also increased.
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At point bank started giving loans to literally anyone, as a result they started defaulting and banks had to sell their houses.
The number of defaulters increased exponentially by 2007 and there was more supply of houses than the demand, hence prices of houses have reduced drastically.
2008, now banks could not realise the loan amount by selling the mortgaged houses as prices were less than half of the loan amount.
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It resulted into liquidity crunch, investors lost their money. Hence some major banks were bankrupted like Lehman Brothers. Effects and Aftermath of The Crisis • •
•
Net worth of American households had declined by about $17 trillion, a loss of 26%. - St. Louis Federal Reserve Bank (2012) Gross domestic product of the country was approximately 7% lower than it would have been had the crisis not occurred, a loss of $70,000 in lifetime income for every American. - Federal Reserve Bank of San Francisco (2018) 7.5 million jobs were lost between 2007 and 2009 approximately, hence doubling of the unemployment rate, which was at nearly 10% in 2010.
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World map showing real GDP growth rates for 2009 (countries in brown were in recession) Government Response American Recovery and Reinvestment Act (ARRA), also known as the Stimulus, designed by U.S. Congress to stimulate the U.S. economy by saving jobs, paralyzed by The Financial Crisis 2007-08 and creating new jobs. The aim was to invest in economic activities that would facilitate long-term growth. To stimulate the economy, a package of $787 billion was introduced. The break-up of the package stated below: 1. $288 billion = Tax relief (aiming at individuals but also aiding companies) 2. $224 billion = Entitlement programs (unemployment benefits, food stamps, and Medicaid) 3. $275 billion = Grants, loans, and contracts (aimed at infrastructure, transport, and education)
What they as policy makers would have done differently through which this problem could have been mitigated or resolved quicker. Banks were affected the most in this crisis. People lost their trust in the banks, they believed that their money is not safe with banks. Due to which banks of all over the world were not having enough money to operate. It makes huge impact on the economy if banks have no money, how they would lend, how the businesses would grow without loans. Therefore, they should have made such policies, by which people could trust banks again and deposit or invest their money with banks. The policies like: • • • •
Strict rules for lending money. Regular check ups on the liquidity positions of banks. Stable interest rate on loans for certain time period. Setting benchmark for the customers who wanted loan.
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Because of the above policies, customer would have gain trust in banks quickly and would have started depositing or investing their money with banks, which could have boosted the economy faster, because banks would be having more money then. Apart from that, $275 billion which was for grants, loans, and contracts, 40% of this amount could have diverted towards employment programs and to boost the company’s growth, as there was huge unemployment. So, providing employment could be the main target, which could have stabilized the economy faster. If both the measures stated above would have taken simultaneously, then the problem could have been mitigated or resolved quicker. References and Sources • • • • • • • •
Brandon Van Der Kolk Brian S. Wesbury Warren Buffet Economic times OECD 2013 Business Insider New York times Bloomberg Business
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Impact of Digital Payments on Indian Economy By: Sanskriti Tulsian and Eshan Jain (Xavier Institute of Management, Bhubaneswar)
Synopsis on Digital Payments in India: Digital payment has come a long way in India from the 90s and is expected to cover at least 70% of the total transaction by the year 2025. The reason behind the rapid growth in people adopting a digital mode of payment is that it is more convenient, easy, the transactions are extremely fast, it is safer and it is much easier to keep track of the payments made through the mode.
The volume of digital transactions has grown significantly in the past years and according to a report by HDFC bank on Statista, 12518.6 million digital payments were made alone in the year 2019.
As per a report of Rakuten conducted on around 17000 people, it was known that at least 88% of them had used e-payment service in the year 2020.
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Amongst the Indians, the third party apps for digital payment is the most used medium followed by UPI and then bank cards.
According to research by KPMG, 48% users make digital payments through mobile devices.
There has been a constant growth in the UPI transaction ever since its launch and stood at Rs 4161.76 Billion in January 2021.
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Digital payments in India has come a long way ever since its inception and has been impacting every industry across India. Impact Industry Wise • MSME India’s Micro Small Medium Enterprises base is the largest in the world after China. The sector provides a wide range of services and is engaged in manufacturing 6000+ products ranging from traditional to hi-tech items. According to Instamojo's 'Indian MSME Impact Report 2019', transactional convenience and monetary incentives to customers create value for nearly two-thirds of the MSMEs, while 20% see value being created from customer preference for digital payment technology, synchronization, and data security. The study also observed a high level of MSME user satisfaction in digital payment technology. Nearly 75% of MSMEs were very satisfied with their experience of digital payment products, while more than 50% considered payment gateway solutions very valuable. Payment systems integrated with business systems of MSMEs are more popular and provide more leverage on the business.
The frequency of payment through the digital payments has also increased across the MSME and as per a KPMG report, 48% people responded that the transaction frequency has increased more than 75%.
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• Retail In the past decade, online payments have allowed retailers to expand onto the internet and given them a chance to emerge into online enterprises. Retailers previously constrained to selling in local markets, now have the ability to sell their products to a wider customer base of internet users across the globe. This has promoted competition, efficiency, lower prices and increased choice. However, given the low educational levels and relatively low socio-economic background of many members of the retail eco-system overcoming external barriers is critically important if the full benefits of digitalization are to be experienced. Paytm is the most preferred mode of e-payment across retails followed by google pay and then PhonePe, in India across genders followed by AmazonPay and then BHIM as per a report by Rakuten where more than 15000 respondents participated in the survey in the year 2020.
• E-Commerce By enabling online retail, e-payments system has generated incremental sales, lowered costs of goods online, enabled greater and newer variety of goods and services such as digital goods and the convenience of transacting 24/7 from any location. Mobile commerce is set to become the primary payment method for online shopping in India. It is used for 46% of transactions, one of the highest rates globally. Mobile commerce will expand at a compound annual growth rate of 31.2% to reach a value of $49.8 billion in 2021. In online transactions in India, the most preferred mode is either through Card followed by Ewallet. 32% of the total share of payments were made by card in the year 2020 as per the report by KPMG followed by E-wallet that stood at 26%. Bank transfer had a total share of 18% of the entire transactions done through digital payment.
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Limitations
From the above figures, it is clear that almost 100% of the people believe sufficient knowledge of technology among users and subsequent security of the transaction are some of the major areas of concern for usage of an e-payment system. Approximately 80% say that, being technology driven, these payment systems are prone to fail and default. An organization should not over rely on electronic systems and have a backup ready. They are vulnerable to attacks by hackers and other forms of online intrusions. Cost implications under this system is another critical issue. Cost of establishing a digital payments structure is huge and there are different types of costs involved. Arrangements and agreements costs, revenue sharing, technology infrastructure cost, legal litigation costs, marketing costs and training costs are some examples of associated costs. There are few other limitations such as hidden charges, limited usage of selected currencies, maintenance and ownership concerns and inefficient grievance handling.
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Future and Growth
In 2020, the frequency of usage of e-payment services was quite high. 27% of the respondents used these services daily while 44% used them as a mode of payment multiple times a week.
Covid-19 was a driving force behind the acceleration of digital payments in India. 33% of the people opted for more digital ways of payment than traditional cash, within a month into the pandemic. A fund allocation of INR 1,500 crore was declared in the recent Union Budget to boost digital payments. The Reserve Bank of India announced the establishment of an infrastructure development fund with an initial capitalization of INR 345 crore to facilitate digital payments in rural India.
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Further, digital payments can be more acceptable by enhancing the system in terms of developing a strong cashless ecosystem, charging zero additional fee for transactions, availability of point of sale systems, more acceptance of cards and awareness across the masses among others. With the rapid speed of digital transition, all sectors are aiming to foster cashless payments, which will improve India's digital payment industry. Conclusion Though India must absolutely abandon cash transactions in order to embark on the path to becoming a superpower in the coming years, there are a few hurdles that must be overcome. With IoTs and artificial intelligence taking over, it is therefore critical to provide a long-term and profitable business strategy that caters to the new-age digital economy whilst also having a strong cybersecurity framework. Despite the fact that the pandemic's volatility has raised the need for cash, more consumers are already turning to contactless payments. Though financial inclusion has provided an opportunity to adapt to digital payments in a developing country like India, the unbanked and underbanked sectors in India offer the greatest opportunity for the growth of digital payments. It is fair to conclude that, for the time being, owing to the pandemic, India's journey from a cash-based economy to a cashless economy has come to a halt at the contactless economy.
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The Greece Debt Crisis By- Saujanya Roy (Indian Maritime University, Kolkata) A financial crisis is characterized as a situation in which the prices of all the significant assets experience a huge decline in their financial value. Many crises have occurred throughout history. One of the most notable is the Greece Debt Crisis which the Greeks have been experiencing as an aftermath of the 2007-09 financial crisis. Greece seems to have suffered the longest duration of stagnation in recent history due to the crisis. Greece, like many other European countries, had experienced the 19th-century debt crisis. However, Greece had emerged as one of the fastest GDP growth rates in the world during the twentieth century. Greece joined the European Economic Community (now the European Union) in 1981, with an impressive debt-to-GDP ratio of just 19.8% on average.
(source- www.sjsu.edu) In October of 1981, the Panhellenic Socialist Movement (PASOK) came into power, ending a brutal seven-year long military Junta. Since then, the power has always shifted between the PASOK and the New Democracy Party (ND). In order to win over the voters, both the parties lavished several policies over the years which resulted in soaring inflation rates, slow growth rates and creating an inefficient, bloated economy. One of the most infamous Policy was to annually increase the salary of all the workers in the public sector irrespective of their performance or their productivity. The workers also received an additional pay (also known as 13 month or 14 month pay) in order to cover for their expenses while they were on vacations or during Easter. th
th
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Source-(www.topal.com)
These unplanned policies resulted in low production, slow growth and diminished competitiveness, which broke the government. During this financial crisis, on January 2001 Greece joined the European Monetary Union (EMU) giving them some glimpse of hope. With the introduction of Euro in 2001, trading cost between the Eurozone countries have greatly reduced and there was a significant increase in the overall trading volume. With Banks investing their money and usage of only Euros throughout the Europe, it significantly lowered the interest rates the Greek government needed to pay (around $172 Billion then). This allowed the Greek government to borrow at a much cheaper rate of interest than before 2001. The annual GDP growth between 2001 and 2008 was increased to an impressive 3.9% and were second fastest behind Ireland in the Eurozone.
(source- en.wikipedia.org)
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However, the membership soon became a very controversial one. Greece’s Debt-to-GDP ratio was found to be 103%, far above the permitted level of 60% set by the Eurozone. Furthermore, Greece’s fiscal defect was 3.7% of the GDP which is also above the allowed limit of Eurozone of by 0.7%. This was soon revealed during the global financial crisis of 2007-09. Greece’s already meagre tax revenues were getting eroded due to the recession weeks and hence worsening the deficit. In 2009, Greek debt was downgraded after many statistical discrepancies were found including underreporting of public debt was also exposed. Greece was suddenly barred from borrowing in the capital market. In 2010, U.S financial rating agencies assigned a “junk” rating to Greek bonds. Greece faced liquidity crisis as capital got dried up. To avoid a crisis, the IMF, the European Commission Bank and the European Commission, collectively known as the troika, agreed to provide Greece with emergency funding and Greece was essentially bailed out. This bailout marked the beginning of what has now become one of the longest crises in modern history.
Source -(www.vox.com)
The bailouts from the International Monetary fund and from other European creditors were contingent on Greece’s implementing fiscal reforms, specifically increased cuts and increased tax returns. These austerity measures triggered a series of recessionary cycle, with unemployment reaching an all-time high of 25.4%. Tax revenues fell, worsening Greece’s fiscal situation. The Austerity measures exacerbated the humanitarian crisis, increase in homelessness, suicide cases reached an all- time high, and a significant decline in public health and lifestyle. The measures implemented in the midst of the worst financial crisis in the world since the Great Depression of 1930, proved to be a major contributor to Greece’s economic implosion. In the wake of the financial crisis, the debt-to-GDP ratio skyrocketed as Greece’s economy shrank reaching an astonishing figure of 180%. The final nail in the coffin came in 2009, when the new government
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took over the office and announced that the fiscal deficit was 12.7% which is double than the previously disclosed figure, further accelerating their debt crisis.
(source- www.atlantis-press.com)
Instead of assisting Greece’s economy in regaining its stability, bailouts only ensured that Greece’s creditors get repaid while the government struggled to put together the meagre tax revenues. While Greece was facing structural problems, such as tax evasions, membership in the Eurozone allowed the country to hide from these issues for a time, but it eventually generated huge economic problems and an unresolved debt crisis.
(source-www.topal.com)
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Several methods have been suggested by economist around the globe, but the government failed to acknowledge most of these methods. Raising the tax revenues is one of the most important solution. The Greek government’s current income is about 42% of the GDP. This is a low to middle figure for the Eurozone where the IMF expects Belgium, France Finland will all exceed 50% by this year. Raising the tax rates and improving tax collections will help the government’s revenue to catch- up with its previous expenditures and gradually balance the budget. The government has been facing enormous pressure from IMF and EU to cut spending. Currently the budget deficit is around 7% of the GDP, and is expected to remain around 5% in the long run. However, cut spending could stymie the Greek economy’s recovery by reducing government employment and salaries and spending in other sectors.
Source -(www.vox.com)
Greece’s return to economic stability is getting hampered by the Euro currency. The government can use inflation to reduce the value of its debts with their own currency. Further, the Greek government cannot issue euros anymore, only the European Central Bank is able to do so. Returning to Drachma would restore Greek authority over their monetary policy. The government would initially struggle to come up with enough drachmas to cover their debt, but gradually the country would be well prepared for their future growths.
(Source- Cambridge.org)
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The Greek debt crisis had stemmed from previous governments’ fiscal mismanagement, indicating that, like individuals, nations cannot afford to live beyond their means. As a result, Greeks may have to endure years, if not decades of harsh austerity measures. REFERENCES
1. 2. 3. 4.
www.britanica.com www.toptal.com www.investopedia.com www.npr.org
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MICROFINANCE By- Sarthak Paikray (College of Engineering and Technology, Bhubaneswar) Microfinance is a type of banking or financial service provided to unemployed people or lower socio-economic background but economically active groups or individuals who don’t have any access to financial services. Microfinance deals with a majority of banking activities such as fund transfer, savings account, microinsurance, checking account and microcredit but on a smaller scale. Microfinance was first set in motion during 1950-80 with the basic aim of alleviating poverty by providing small scale loans to local villagers who didn’t possessed any meaningful collaterals. Microfinance was first pioneered by Nobel Prize winner Muhammad Yusuf in Bangladesh in 1970s.It was initially started with microcredit which is the practice of providing extremely small loans to those who don’t have a regular source of income, fundings or any credit history. The term microfinance describes micro-loans, micro-savings and micro-insurance. Microfinance firms helps in providing small loans and other resources to business owners and entrepreneurs to help them get their business off ground. It basically aims to support small scale entrepreneurs who don’t possess any kind of financial assistance to initiate a business or capitalize on an idea. However, the risk or the major disadvantage that these microloans possess is that the interest rates charged on these loans are quite high. Micro-savings account also comes under microfinance umbrella. These allow entrepreneurs to have a savings account with no minimum balance. Micro Insurance provide borrowers with lesser premium and lower rate. Another major advantage of finance literacy is that they provide financial literacy to its customers. Those who receive microloans are required to take training courses. These courses include cash flow management, book-keeping and other relevant skills. Access to cell phones and internet around the globe has also made micro finance easier since potential borrowers use their mobile phones as banking channels. Microfinance has also helped women to break the cycle of poverty and illiteracy. In 2018, 80% of major microfinance borrowers were women.65% of total borrowers lived in rural areas, which implies that a large number of female micro finance borrowers lived in rural areas with limited resources and facility. Although Microfinance is a promising way to impart global education and drive away poverty, few certain aspects of microfinance makes it unrealistic for some group who are in need of help. Few other disadvantages of microfinance claim that it can take undue advantage of those in tough economic conditions which is similar to loan sharks. Few Microfinance loans may include interests as high as 30% or even higher. According to several studies, few recipients of microfinance loans had no improvement in their net annual income. A majority of developing nations are struck with poverty as a leading roadblock to their progress. The major factor which influences the widespread poverty in nations, such as India is the massive disparity in income distribution. The manufacturing and tertiary sections have been making steady progress since the past 2 decades, but still there is a long way before they outgrow
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the former. The large agrarian sector of Indian population seems deprived of formal financial services because of limited functioning of tertiary industry. The concept of microfinance was introduced in Indian economy with the main objective of financial inclusion of more impoverished and backward section, especially women. The progress trajectory of Indian microfinance industry has been phenomenal since the time it was introduced. Factors such as the support of NABARD (National Bank for Agricultural and Rural Development), linkage of banking system with self help groups have further steered the undeserved sectors of Indian Economy towards success through Microfinance. However when it comes to comparing the plush success of commercial banks, it’s only good to conclude that microfinance institution have a long way to go. The Microfinance institutions not only lag in structural and operational approach but also in overall financial process. The various challenges faced by Microfinance institutions in India are Over-indebtness, higher interest rates in comparison to mainstream banks, widespread dependencies on banking system, inadequate Investment validation, lack of enough awareness on financial services in the economy, regulatory issues. Although it has come a long way, microfinance sectors can use technological aids to its own advantage to advance loans to rural people. Microfinance personnel must be well equipped and trained with project management capabilities so as to be able to impart knowledge to borrowers geared towards successful self reliance projects. Microloans shouldn’t be offered for any purpose other than self reliance projects or entrepreneurship ideas. Sole purpose of loans must be properly assessed by trained project management employee so as to check the sustainability of the project before issuing out the loan. Microfinance institutions should work as a group so as to avoid double crossing unless on exceptional circumstances depending on moral and entrepreneurship idea of an individual or a group. The interest rate charged must be constant and at reasonably lower rates in order to help the borrower develop his/her capabilities sustainably out of poverty. The government must enforce strict legislative measures to regulate all activities of microfinance.
Finally, in spite of all the challenges faced by Microfinance, it is till the number one bottom up approach on development with a bright future with supports from international agencies and organizations worldwide by recognising the importance for its development. While Microfinance is unable to reach all economic segments of a society, it has been found to reach segments previously un-serviced by other financial markets. A combination of innovative ideas, technological skills, trainings and lessons from other successful peripheral economies like China and India will be major breakthrough towards the fight against global poverty.
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