Arbitrage Magazine - July 2020 - Finance & Investment Club | IIM Rohtak by Finance and Investment Club, IIM Rohtak

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JULY 2020 Vol 4 Issue 5

Our best read- Can the Modern Monetary Theory come to Indiaâ&#x20AC;&#x2122;s rescue to revive the economy or is it too good to be true?

Special Mention: Indian Mutual Fund Industry: Creating a New Normal

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INDEX

S.No.

Article

Page No.

Can the Modern Monetary Theory come to India’s rescue to revive the economy or is it too good to be true?

Indian Mutual Fund Industry: Creating a New Normal

Behind the Shine – Understanding the Boom in Gold Prices

India-China Trade: Dynamics of boycotting

FinTech Impact of Banks

China’s Building Block Bank

Unlocking Digital Finance

Developing a Manufacturing-based Economy by capitalizing on manufacturers exodus from China, Workforce & Policies

The Dangerous Trend Towards Passive Investment in the Share Market

Financing the Future Footprint: The effect of carbon on a company’s finances

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Can the Modern Monetary Theory come to India’s rescue to revive the economy or is it too good to be true? By: Nilomee Savla (K.J. Somaiya Institute of Management)

Introduction COVID-19 was declared by the WHO as a public health emergency of international concern in January 2020 and a pandemic in March 2020. Since then, it has evolved and become a global public health and economic crisis causing a severe impact on the $90 trillion global economy beyond anything that the world has ever experienced. According to the estimates of the International Monetary Fund (IMF), the world economy is expected to shrink by over 4.9 per cent in 2020 – the steepest slowdown since the Great Depression of the 1930s. As the pandemic pushes the global economy into recession, many countries have rolled out fiscal and monetary support programmes to mitigate its impact. The size of fiscal intervention by the countries is varying – but mostly in double-digit percentages (of GDP). Developed economies like US, Japan and Germany announced packages in the 10 - 20% (of GDP) range. Even an emerging economy like India announced a stimulus package of 20 lakh crores in May 2020 along with previously announced measures that together roughly work out to be 10 percent its GDP.

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How global coronavirus stimulus packages compare (% of GDP) 25.00% 20.00% 15.00% 10.00% 5.00% 0.00% Japan

Japan

Sweden

Sweden Germany

Germany

India

France

Spain

Italy

China

South Korea South Korea

Figure 1

The biggest question however that has gained prominence is the obvious one – how to finance the huge expenditure? The conventional approach of the government would be to borrow money, which would lead to a fiscal deficit. However, government borrowings have the potential to increase interest rates, and as the savings in an economy are fixed, more money lent to government would result in lesser capital available for private sector. Higher government deficits, therefore, ‘crowd out’ investments. And this is something that is best avoided in the current scenario. This is where a heterodox macroeconomic theory that has been gaining traction - Modern Monetary Theory or MMT comes into the picture. The theory has been around for a while, but has recently gained prominence through the work of American economist and advisor to Bernie Sanders' 2016 presidential campaign, Stephanie Kelton, whose book “The Deficit Myth” got published in June this year.

So what exactly is Modern Monetary Theory (MMT)? ▪

▪

Modern Monetary Theory (MMT) is a heterodox macroeconomic theory which applies to any economy that imposes obligations (like taxes) and issues obligations (like government debt) largely in its own sovereign currency. According to the theory, this economy isn’t subjected to any budgetary limitation because it “cannot ever run out of money”. It can print (or digitally create) money as it is the monopoly issuer of the currency. The primary objective of the economy should be to reach the level of full employment. As long as there is unemployment, MMT insists on government spending for job creation, and not worry about persistent fiscal deficits.

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▪

When the economy achieves the level of full employment, it may experience a rising inflation. The government can impose taxes and increase its borrowing to control the inflation. Under MMT, taxes and government borrowing are tools for tackling inflation, rather than funding government spending.

The application of MMT in the current situation In essence, MMT seems only moderately relevant to developing economies like India. The United States can afford to run persistently large fiscal deficits due to the vast global demand for the USD as a reserve currency. As of 2019, 61% of global forex reserves were denominated in US Dollars, followed by euros at 20.5%. The only developing economy currency which came in the top ten was the Chinese Renminbi, accounting for a marginal share of just 2% of global reserves.

Global Forex reserves 4.60%

8.200%

5.70%

20.50%

61%

USD

EUR

JPY

GBP

Others

Figure 2

Let us weigh the MMT prescription for IndiaSuppose the government approaches the RBI to print money and increases the spending to boost employment, without worrying about persistent fiscal deficits. However, this is accompanied by a caveat. The domestic output growth will have to keep pace and meet the aggregate demand fostered by such a large spending. If that doesn’t happen, we would be in a situation where too much of our currency is chasing too few goods. This will lead to a spike in inflation rate, which is one of the major consequences of MMT. In the Indian scenario, it won’t immediately translate into a higher inflation rate due to the current demand slowdown that our economy is experiencing. However, when the economy progresses into the recovery path, increased money supply could proportionately lead to a higher inflation rate. For June, the inflation rate as measured by the CPI was 6.09 per cent, with the core inflation rate being 4.9 per cent. Presently, fluctuating food prices have been a major contributor to the inflation

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rate, and when the core inflation moves up, the overall inflation rate would settle at a higher range. And therefore, it would possibly become a challenge for the RBI to follow the inflation targeting regime of 4 per cent, +/- 2 percent. Similarly, unlike the US dollar, the Indian rupee is not considered a safe haven currency. Even when the US Federal Reserve prints more currency, there will still be a strong global demand for the US dollar. However, it will not be the same case for the Indian Rupee. Thus, when there is excess supply of the Rupee, it could lead to a depreciation of its value, leading to an outflow of foreign investment, which would further have a negative impact on our GDP growth and employment. The world economy is currently facing a demand slump, and the IMF has projected a negative GDP growth rate for the global economy in CY20. Thus, a fall in rupee value would be disadvantageous for the Indian economy. Under such a scenario, the RBI would be forced to intervene in the forex market to stabilize the falling rupee by selling dollars. India, currently, has a comfortable foreign exchange reserves of 513.25 billion USD. However, the Central Bank cannot indefinitely intervene in the forex currency market to stabilize the Rupee. Though RBI participates in indirect monetization of deficit through its open market operations (OMOs), the consequences of direct monetization by the application of MMT are much larger. It could weaken the macro fundamentals of India, risking a downgrade by the credit rating agencies. The decision of the rating agency, Moody’s, to downgrade India from Baa2 to Baa3 should already come as a sign of warning. Its current rating is just one notch above the ‘junk’ category.

Conclusion MMT would encourage sustainable large fiscal deficits, the kind that many of us would love to see now. However, there is no free lunch, even under MMT. Unless an unlikely large global demand for Rupees emerges, the increased government expenditure has to be matched by a real increase in domestic output and employment. Even before COVID-19, the economic context of India was not very conducive for achieving job creation and sustainable growth through MMT. So unless India is able to improve its macro fundamentals, it cannot afford the application of MMT in the present scenario. Resources: 1. https://www.investopedia.com/modern-monetary-theory-mmt-4588060 2. https://swarajyamag.com/economy/fiscal-stimulus-what-is-modern-monetary-theory-and-howrelevant-it-is-for-us-now 3. https://www.livemint.com/news/india/is-government-printing-away-the-deficit11587649380097.html 4. https://in.reuters.com/article/india-economy-inflation/expert-views-indias-june-retail-inflationpicks-up-to-609-y-y-idINKCN24E1ND 5. https://www.imf.org/en/Publications/WEO/Issues/2020/06/24/WEOUpdateJune2020

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Indian Mutual Fund Industry: Creating a New Normal By: Zain Ansari (IIT Bombay)

Introduction: The first ever mutual fund scheme was launched in India in 1964 by Unit Trust of India (UTI) called Unit Scheme. It was the initiative of Government and RBI with a view to broaden financial market participation. Since then the industry has gone through a different phases with the entry of public and private sector funds in 1987 and 1993 respectively. The Assets Under Management (AUM) has grown from Rs. 47,004 Cr. in 1993 to Rs. 22,86,400 Cr. as on June 18. Although the AUM has increased above Rs. 20 lakh Cr., the industry has had bumpy ride as after the meltdown of 2009 the investors had suffered great losses with the faith in MF products being shaken. The abolition of Entry load by SEBI also deepened the adverse impact on the industry.

Growth of AUM of the Industry over time (Data Source AMFI)

Current Industry Status: Currently there are 44 AMCs operating in India broadly categorized as Bank Sponsored, Institutional and Private Sectors. The industry has a tiered structure with top 7 AMCs have about 70% of industry AUM. The individual investors hold 52% of the total assets while the institutional occupy 42% out of which the 90% are corporates. The 81% of the institutionâ&#x20AC;&#x2122;s asset are held in liquid /money marketâ&#x20AC;&#x2122;s debt schemes, reflecting the Capital Protection and Return Optimization as primary motives, whereas for retail investors 68% of the total assets are held in equity oriented schemes reflecting the preference for long term growth. This financial year has witnessed a strong growth in assets with the Individual investors having 25.49 Lakh Cr. representing an twofold increase over June 15 with equity schemes registering 41% increase.

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Growth of AUM of the Industry over time (Data Source AMFI)

Distribution Networks: The top 15 (T-15) cities continue to form the major contributor to the industry’s AUM with New Delhi having highest AUM per Capita and Maharashtra contributing to 42.1% of the total AUM. In the distribution Independent Financial Advisors (IFA) play a key part in fund distribution as they regularly interact with the investor and offer advice on the asset allocation and diversification. The other channels include the direct, National Distributors of AMCs and Banks. Currently the Direct channel constitutes only 36% of the AUM.

Innovations: The Fund performance holds the highest weightage in selection of a particular scheme in India. The Indian fund houses have introduced various types of SIPs (Systematic Investment Plan) like ‘Value SIP’ which increases or decreases the monthly contribution based on the performance of the fund. The Linking of Debit card to the investments is also gaining popularity, this allows customer to withdraw cash or make purchases with the amount that is invested in the mutual funds without the delays associated with the withdrawal from a typical mutual fund. This scheme can be extended to both debt and equity schemes. The ETFs are very popular investment vehicle across the globe due to their low cost structure, one of the primary requirement to invest in the ETF is the demat account, due to sluggish growth in the number of demat accounts in the country the investment in ETF have not picked up. The industry has invented specific products that help invest

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in the gold ETF without holding the demat account, this fund act as a feeder fund and invests the money into the gold ETF.

Growing Further Into Bharat: The 2018 and 2020 SEBI Mutual Funds regulations have introduced landmark steps towards deepening Mutual fund penetration in India. The first mandates the mutual fund to spend the 2 basis points of their daily net assets for investor education and awareness initiatives. These include education initiatives at school, Colleges, women etc. The second is the District adaptation program, which aims to bring about financial inclusion of mutual funds in India. This holds much relevance today as the rural population is expanding towards 900 million and is expected to contribute 50% of the Indian Internet users by 2021. As mentioned earlier the penetration of the industry has been limited to the Top-15 cities; the rural segment represents the plethora of opportunity for the industry if the investor awareness is carried out effectively. Setting path for the future: • Improving Distribution: Since distribution plays the biggest role in Mutual fund penetration, the adoption of new channels along with enhancement of existing networks play a crucial role. The following can help enhance the network: • Better Utilization of Banking Channels: The banks can use their existing network of branches to sell the mutual fund products. • Revised Commission Structure: The compensation structure for IFA can be transparent so that it helps customer judge the quality of the prospect scheme. • Using the Mobile Phones and Handheld devices: The mobile phones can be used to sale/purchase of mutual funds via the applications or e- wallets. • Partnering with E-Commerce: SEBI has submitted recommendations to allow the major ecommerce joints to sell funds thereby making them more accessible to general public. Leading Fintech Company Paytm has already announced the launch of Paytm Money. • Use of Aadhar as E-KYC: The use of Aadhar for E-KYC has proved to be game changer for the industry. In future the use of Aadhar can be extended further to integrate with other schemes. • Use of Big data Analytics and Social Media: The data collected from various Transfer points and unstructured data from social media sites like Facebook and Twitter can be used to gain insights into the investor’s behavior. • Robo-Advisory: The leading global advisory firms such as Blackrock have already started to deploy the robots for the advisory process, the Indian space has also see firms like FundsIndia providing platforms to surpass traditional advisory and invest directly. • Use of Disruptive Technologies like Block-chain: Global asset management giants like Aberdeen Asset Management have already started to use blockchain in their daily processes. Blockchain offers reduced costs and speed up settlements, which can be used to create linkage between the mangers and distribution thereby bringing increased transparency and reduced operational costs.

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Conclusion: During the last 3 year after the demonetization the mutual fund industry has seen a great surge in the AUM driven by the good stock market returns with low volatility and increase in cashless transactions. But there lies a huge untapped market for the industry in the form of rural and semi urban areas of the country, where the financial inclusion for mutual funds is the task pending completion. Also there lies potential for other financial products like ETFs and structured products. As the outlook for Indian economy remains positive over the long run, the Indian Mutual fund Industry can continue to grow as well if its innovates itself through time and technology.

References: 1. http://shodhganga.inflibnet.ac.in/bitstream/10603/102710/7/07_chapter%203.pdf 2. https://www.pwc.in/assets/pdfs/publications/2017/mutual-funds-2-0-expanding-into-newhorizons.pdf 3. https://www.icraonline.com/img/PDF/assocham1.pdf 4. https://www.amfiindia.com/investor-corner/

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Behind the Shine â&#x20AC;&#x201C; Understanding the Boom in Gold Prices By: Gautam Kumar Goyal (IIM Lucknow) Gold has been among the best performing asset-classes of 2020, returning over 30% in Rupee terms, and 25% against the United States Dollar. In July 2020, the price gold zoomed past its previous all-time high of $1,927/oz, set nine years ago â&#x20AC;&#x201C; in the third quarter of 2011. The previous peak was set after the Global Financial Crisis against the backdrop of credit rating downgrade of the United States, mass rioting in England, and the Eurozone debt crisis. The current setting of a global pandemic, impending US elections and deglobalization fuelled by a trade war between the globe's most powerful economies, paints a similar picture of gloom and doom. The recent performance of the yellow metal must also to be assessed in light of central banking actions, money flow, and yields on alternative asset classes.

Historical context

Figure 1: Gold price since the 1970s, after the collapse of the Bretton Woods system

Compared to other asset classes, the argument of gold as a financial investment is a relatively contemporary one. Historically, gold has been a store of value and a standard for money. After the Second World War, most financial powerhouses like the United States and most Western European economies adopted the Bretton Woods system, whereby external exchange rate bands would be gold linked. Naturally, this meant that gold prices would display little fluctuation against individual currencies.

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In 1971, the United States unilaterally terminated convertibility of the US dollar to gold, effectively bringing the Bretton Woods system to an end, marking an Anno Domini moment for gold. Since then, gold has seen three large spikes. By 1980, the price of gold bid up from $35 per ounce to nearly $600 per ounce. Gold, being a traditional store of value, was seen as a hedge against double-digit inflation in the United States. The second spike was between 2000 and 2011, a period that saw the Dotcom bubble, the 9/11 attacks, and culminated with the Global Financial Crisis. The current rally is the third such spike in the modern era, as the world battles a global pandemic, and traverses the deglobalization induced by a trade war between the world’s largest economies.

Understanding the current rally With a recent surge in coverage, one could very easily mistake the rise in gold prices to be a sudden phenomenon. In reality, the groundwork for this incredible rise was in motion since late 2018. There also exists a view that prior to the COVID induced lockdowns, conditions were already favourable for a rally in gold prices, with the current scenario playing the role of a catalyst more than a trigger. In this context, it is imperative to explore the various angles of the recent rally in the price of gold. 1. Geopolitical uncertainty, trade tensions, and COVID-19 – Gold is viewed as a safehaven asset in times of political or financial risks. Being a physical commodity, it is not at risk of becoming worthless, unlike fiat currencies or other assets bearing credit risk. Over the last few years, there has been a constant flow of geopolitical events inducing global uncertainty. There were concerns regarding trade tensions between the US, China, and the European Union, the outcome of Brexit, and uncertainty concerning the stability of some European economies. These factors have contributed to the resilience of gold prices over the last couple of years. Some of the geopolitical uncertainties subsided in 2019 through early 2020. A trade deal between the United States and China suggested the possibility of a risk-on sentiment. However, the COVID-19 pandemic proved to be a catalyst for a further rise in gold prices. With lockdowns in countries around the world and a complete halt in mobility, concerns range from supply-side manufacturing issues to decreased business in the services sector. In February 2020, stock markets worldwide saw their highest single-week declines since 2008. As risky assets fell out of favour with investors, money flowed to safe havens such as treasuries and gold. 2. Central banks’ stance and money supply – Most major central banks, including the US Fed, ECB, and the RBI, have taken a dovish turn over the last couple of years. Even before pandemic ravaged the global economy, central banks cut benchmark rates pre-emptively to tackle an impending economic slowdown. The emergency measures to boost the money supply in response to the crisis flood the markets with excess liquidity.

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Figure 2: Relation between gold prices and money supply over the last decade. This excess liquidity finds its way to financial assets including physical gold, and gold-linked investment products Investors are also closely monitoring inflation expectations. Projections that fiscal and monetary stimulus could eventually lift consumer prices faster than interest rates while devaluing traditional currencies are fuelling some bullish gold bets. 3. Yield-starved investment landscape â&#x20AC;&#x201C; Excess money supply has led to low yields on other safe-haven securities. This moderates the perceived disadvantage of gold as an asset with no yield, and storage costs. An asset that provides no yield is more attractive in an environment where very little else offers a return either. The worldâ&#x20AC;&#x2122;s pile of debt with a negative yield has climbed to the $15 trillion mark, prompting investors to question the wisdom of owning bonds, and consider shifting to non-yielding safe-havens like gold instead. 4. Speculative interest: The aforementioned factors coupled with momentum in gold prices have prompted hedge funds and other speculative investors to lift net bets on higher gold prices. Exchange-traded funds, which had $118 billion in gold assets a year ago, now command $215 billion. In the first half of 2020, gold-backed ETFs saw 18 consecutive weeks of inflows, and lured in a record $40 billion, up from $5 billion in the first six months of 2019. Thereâ&#x20AC;&#x2122;s also shades of Veblen effect in gold prices. When gold prices shoot up, it excites commentators, investors and consumers, making rallies self-perpetuating.

Conclusion Gold is often regarded as a universal currency that shines brightest when the news is darkest. A confluence of geopolitical tensions, macroeconomic factors, and external risks led to a Goldilocks scenario for gold. The resilience of gold prices over the coming weeks would depend on the progression of the risk sentiment in response to the post-crisis economy, and absorption of money supply as economic activity picks up. Despite the surge, market participants caution that positive news about

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coronavirus vaccine developments and the global economic recovery could be a headwind for precious metals. In the long-term, if the paradigm shift toward negative yields sustains, gold could see renewed interest as an alternative to government notes. In that scenario, interest from long-term investors such as pension funds might have the dual effect of accentuating the rally and curbing volatility in prices. This could have a significant impact in the long run, since currently less than 20% of pension funds are estimated to have an exposure to gold. Whether such a situation is realised will be seen over the coming years. A more immediate concern is the rate of flow of â&#x20AC;&#x153;hot moneyâ&#x20AC;? into gold, which sparks concerns of excess speculation. Such interest is often fickle in nature and could lead to heightened volatility. Additionally, if the economic turmoil prompts a bout of deflation that Central Banks are unable to address, the precious metal may come under pressure. It would be prudent to be aware of these extremes in demand, since gold may not glitter forever.

References 1. https://www.wsj.com/articles/gold-etf-inflows-hit-record-as-bullion-rally-continues11594216597 2. https://www.wsj.com/articles/golds-rally-depends-on-the-feds-policies-working11586937820 3. https://www.wsj.com/articles/tumbling-dollar-unleashes-precious-metals-rally-11595426974 4. https://www.wsj.com/articles/gold-rallies-above-1-800-to-cap-strong-quarter-11593549228 5. https://www.newsmax.com/finance/markets/unlikely-buyers-goldrally/2020/07/29/id/979542/ 6. https://www.bloombergquint.com/markets/uncertainty-will-likely-push-gold-to-2-500agnico-ceo-says 7. https://www.forbes.com/sites/greatspeculations/2020/04/08/excess-money-supply-hasbeen-like-miracle-gro-for-gold-prices/#5cac920dbe41 8. https://www.globalintergold.com/gold-news/read/gold-is-the-currency-of-the-future163#:~:text=The%20abolition%20of%20the%20gold%20standard%20led%20to,the%20purch asing%20power%20of%20the%20dollar%20against%20gold. 9. https://www.thebalance.com/gold-price-history-3305646 10. https://www.bullionvault.com/gold-news/gold-rates-032820183 11. https://goldprice.org/gold-price-history.html

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India-China Trade: Dynamics of boycotting By: Shubham Joshi & Lovesh Gupta (UBS Chandigarh)

China's expansionary policy relies on two major pillars- Military/ Political pressure and Economic imperialism. The military/political pressure can be seen in the South China Sea dispute, Hong Kong dispute etc. while its Economic imperialism policy or debt diplomacy, is visible through the OBOR initiative. Even the current dispute with India is a part of its military pressure tactic, which our troops are handling with sheer diligence and determination. But this standoff has again given rise to antiChina sentiment on our social media platforms where a complete boycott of Chinese goods and services is being demanded. In this post, we would like to explore the intricacies of trade between both the nations so as to know all the aspects of it. Let us first have a macro-level overview of the immersion of Chinese firms in Indian markets:

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To understand the things in the micro aspect, we can divide the Chinese involvement in Indian markets in 3 major ways:

i) Chinese investments in Indian companies: China has invested in most of our successful startups. Boycotting these companies may harm us more than China as it has taken them years to make the current ecosystem. The reason why Indian startups and companies look for foreign fundings is that Indian banks, which are major credit provider in our country, are actually very small in size when we compare them with Chinese banks. And since rising NPAs has always been tension for Indian banks, it stops them in betting money on startups as they have to burn excess cash initially to penetrate into the markets. The suggestions of merging top tier banks have also been proposed by committees like Narsimhan Committee to boost the credit availability and hence the economic growth of India. Chinese capital that has received cold shoulder elsewhere is welcomed with open arms by Indian Start-up ecosystem. Chinaâ&#x20AC;&#x2122;s consumption market resonates with the situations in India, and hence China offers a much better growth template for Indian Start-ups than its Western counterparts. Here are a few major companies where China holds its stakes:

Source: https://hindi.news18.com/news/knowledge/scenario-of-speedy-chinese-investment-inindia-despite-disputes-between-two-nations-2097013.html ii) Companies taking Chinese raw materials:

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The success story of the Indian pharma sector is not hidden from anyone. India is currently the largest provider of generic drugs globally. Indian pharmaceutical sector industry supplies over 50 per cent of global demand for various vaccines, 40 per cent of generic demand in the US and 25 per cent of all medicine in UK. But only a few know that Indian drugmakers import around 70 per cent of their total bulk drugs from China. More than 60% of Chinese exports to India comprise of electrical machinery and equipment and organic chemicals, with an additional 7% in the form of plastic articles and fertilizers. The automobile market, especially 2-wheelers company like Bajaj and TVS, which exports to more than 70 and 60 countries respectively will also face a backlash if they are forced to stop their Chinese imports as purchasing locally might increase their costs and make their products loose their competitive advantage. Even our evolving agrochemicals market, which exports more than 50% of its production will get hurt, as it imports its raw materials from China.

Source: www.livemint.com iii) Chinese owned companies: According to the DPIIT data, India received FDI from China worth $2.34 billion (Rs 14,846 crore) between April 2000 and December 2019. Even though the amount is small but still it is in important sectors like automobiles, which alone received 40% of the total. The Chinese companies operating in India not only provide employment to Indian people but are also providing products at 10-15% cheaper price. And this saving has helped businesses like restaurants, movie halls, parks etc to thrive. If people are forced to increase their spendings on certain sectors, then they will reduce their consumption from these other sectors because income is constant in both cases. We all know how skewed is the trade between China and the US. But as per Oxford, the cheap Chinese imports have enabled an American household to save on an average $850, which comes out to be close to 100 billion USD in total. Taking into consideration the money multiplier effect of USA (which is 3.01), it comes out to be 300 billion USD. In the case of India, the money multiplier effect is close to 6, so a saving of 1 rupee helps the Indian economy by 6 rupees.

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Below are a few Chinese firms (Xiaomi, Realme, Oppo and Vivo) that are dominating the Indian smartphone market: Source: www.candytech.in

The current problem of India is structural. Here are a few crucial bottlenecks where we are lagging behind China (compiled from world bank database):

These issues need proper centre and state coordination in policy making. Apart from bureaucratic and administrative reforms, a structural roadmap is required. For examplei) For starters, we can ask all our domestic units to limit their dependency on China for subassemblies and inputs to not more than one-third of final product value. The rest can be sourced from other countries initially and later government should help these input industries to develop in India through various schemes and subsidies. ii) For Chinese firms producing in India, duty-free import should only be provided upto the same limit (one-third), and beyond that duties should increase gradually.

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iii) Using non tariff barriers to promote the domestic industries and let them develop an ecosystem. iv) Reinventing our SEZs with resolving the structural challenges like better infrastructure and lesser bureaucracy. Logistic infrastructure updation with new processes like e-way bill is required. v) Working on developing a cluster-based nexus to develop certain industries in areas where they can gain competitive advantage through easier access to factors of production as well as better connectivity to markets. In 1930, China tried boycotting all the Japenese products to protest against Japenese colonization but failed. In 2003, the US tried boycotting French goods to protest against France's refusal over sending troops to Iraq post 9/11 but failed again. Many other countries in the past have attempted boycotting products from different countries but failed. Moreover, if we go by official statistics, then China depends on India for only 3% of its total exports whereas Indiaâ&#x20AC;&#x2122;s export to China is close to 6% of its total export and if we consider Hong Kong also then the figure reaches 9% for India. We are not saying we will be affected more, but we will also be affected. We should look at the bigger picture, instead of being hostile, would it not be better if, at this time when other countries are also against china, India should take advantage and negotiate with china on better terms of trade and focus on sectors in which India have or can have a competitive advantage and strategically reduce the trade deficit. Since both India and China account for 30% population and 20% GDP of the world. So maybe a symbiotic association could be a better alternative.

Source: https://qrius.com/narendra-modi-3-greatest-threats-civilisation/

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References: 1. https://www.ibef.org/industry/pharmaceuticalindia.aspx#:~:text=India%20is%20the%20largest%20provider,in%20the%20global%20pharmac euticals%20sector. 2. https://varunmalhotra.co.in/ 3. https://www.moneycontrol.com/news/business/moneycontrol-research/how-dependent-isindia-on-china-here-is-what-trade-data-reveals-5346201.html 4. https://www.firstpost.com/business/coronavirus-set-to-hit-revenue-in-pharma-electronicsectors-as-supply-of-raw-materials-from-china-dwindle-8093061.html 5. https://www.investindia.gov.in/team-india-blogs/five-facts-about-india-china-trade-andinvestment-relations-indian-perspective 6. https://data.worldbank.org/country/india 7. https://www.livemint.com/

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FinTech Impact of Banks By: Rhishabh Singh (Great Lakes Institute of Management)

Introduction FinTech is the abbreviation of "Financial Technology". It's an intricate blend of economic services and technological innovations in an ever-evolving ecosystem of customer expectations. Innovation in FinTech industry has taken the planet by storm which isn't restricted to a selected geographical location rather its spread worldwide. FinTech shifts the gear of insurgency.

FinTech is employed to portray new technology that appears to boost and automate the conveyance and utilization of monetary services. At its center, FinTech is employed to assist organizations and customers to accommodate their monetary tasks, procedures, and lives by using specific software and algorithms that are used on PCs and progressively on smart phones. This term covers an oversized scope of techniques, from data security to financial service deliveries.

Since the start of the 21st century, a shift has taken place toward more consumer-oriented services. To call some, FinTech includes various sectors and industries such as retail banking, education, investment management, and fund raising. It also requires the use of cryptocurrencies such as Bitcoin. For venture capitalists, it is the fastest growing regions.

Solutions offered by FinTech are often economical as compared to corporate and retail banks. FinTech banks aim to form banking life easier and more customizable at lower rates. While new entrants have recognized the need for increased customer inclination as a chance and are building solutions to handle this within the market, traditional banks are still lingering. The threats accounted by FinTech have the aptitude to shatter four categories of bearersâ&#x20AC;&#x2122; business: 1. 2. 3. 4.

Margins Market Share Information Security/ Privacy Customer Churn

Some of the prominent players: World

Revenue

India

Revenue

PayPal

17.7 billion

Paytm

500 million

ZhongAn

2.1 billion

Billdesk

127 million

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Stripe

1.8 billion

PayU

112 millions

Qudian

1.3 billion

PhonePe

106 million

Ant Financials

611 m

Policy Bazaar

90 million

Both banks and FinTech have their positives and negatives, and instead of working in silos and endeavoring to focus on a similar client sections, they will profit by collaborating and joining their positives to make up for one another's negatives. Banks can give a quick arrive at critical financing and support, and continue clients' developing requests. The FinTech division can offer the most productive client care solutions. FinTech landscape can be broadly segregate into three buckets: 1. Payments: such as Plastic Cards, e-Wallets, Mobile Payments and Cryptocurrencies. 2. Process enhancement: such as Cybersecurity, Fraud and Risk Management and Big Data Analytics. 3. Customer engagement: such as Internet and Mobile Banking, P2P Lending, Crowdfunding

Incumbents and New Entrants: Co-operation or Competition? New Entrants put pressure on incumbentsâ&#x20AC;&#x2122; traditional business model by emphasizing on customer because clients are the gist of their business. Banking is drifting from being connection based where soft information is pivotal, to data driven and the market based where hard knowledge reign. FinTech organizations can make an incentive which is both engaging and financially savvy for clients. Banks can't concentrate on such creative usage of innovation and henceforth remain to lose customer base to up and coming FinTech firms. Banks have a much bigger client base and unwaveringness that has been worked throughout the years. They additionally have strong financial backing that allows them to place resources into up and coming patterns and thoughts that are past the span of FinTech associations. To put it plainly, the FinTech sector offers development and disruptive innovation, while banks can drive client request.

Investment Management FinTech organizations have presented Robo advisory services, offering computerized financial advisory dependent on a pre-defined set of algorithms and calculations at a remarkably decreased price. FinTech organizations offer complete online and digital trade execution facilities, at a small amount of the expenses, as compared to traditional brokers. AI (Artificial Intelligence) and ML (Machine Learning) are making Financial Management more brilliant, quicker and progressively compelling.

Payments In many developed and developing countries, the growth of digital wallet is because of widespread use of smartphones and easy accessibility of internet and online purchase practices. With time, digital wallets are now not just used for payments and transferring money, they have evolved themselves and now offer several

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financial services which are comparable to the banks, increased the threshold of the sector and also has challenged them. India has seen a revolutionary change in digital payments. One of the major reason for the boom in this is because of the black swan event of Demonetization which forced society to do digital transitions. A remarkable growth is observed in the payment sector in the past couple of years with the launch of new modes and interface of payments such as Bharat QR Code, BHIM, UPI (Unified Payments Interface) so as to lead digital transactions. Factors that can lead to FinTech success: Safety Lower costs Acceptance of low value transactions Reduced losses Enhanced record keeping

eliminating risk of handling cash for both customers and merchants avoids high point of sales (POS) and remittance fees as little as â&#x201A;š1 eliminating loss of receiving fake currency readily accessible transaction records

Challenges 1. Guidelines: Balancing Act to encourage development Create an environment that promotes development, while appropriately addressing concerns on client protection, information security and privacy. 2. Gain trust and improve observations through education FinTech may be a new segment and it is significant to coach the target customers about the advantages of availing financial services through FinTech. 3. Data and Cyber security Urgent requirement for financial institutions to put in biometric technologies and adopt cybersecurity solutions.

Future for bank It is crystal clear that bank will not only stick to their conventional rules and strategies and will drift away from physical distribution to tech platforms. As the banking sector has emphasized on advancement of technology and keep them up to date with current trends in the market, they are becoming more digitally savvy thus increasing the brand value. This will be a considered as a strength in banking domain. By portraying trust, superior service to the customers, integrity and most important privacy and security, banks can comfortably solve transaction problem. The future seems to be very bright for banks.

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Conclusion FinTech is an emerging industry which uses advance development and innovation to improve financial experience of the customers. It simplifies the traditional complex process being followed by banks for decades by using technology and offers pompous customer experience. Technology is helping financial service providers to build a customer centric personalized experience by: 1. Using AI and ML for modern and smart services 2. Payments via smartphones 3. Demand for assistance Customers want simple use, personalization, convenience and accessibility. They require transparency and no hidden costs that pops as a surprise. With 24/7 access, FinTech offers services accessible via non-traditional channels that accredit customers. â&#x20AC;&#x153;Banking is important, banks are notâ&#x20AC;?, the revolutionary declaration made in 1994 by business turned philanthropist Bill Gates became a self-fulfilling prophecy with nearly 10,000 FinTech companies around the globe now seeking to obtain profitable business from the banking industry. FinTech industry have raised the standards of financial sector by improving the quality and reducing expenses. They are not bound to follow any traditional set guidelines and legacy operations like conventional banks and therefore with the help of advance IT services and flexible operation models, they can pass on benefits to their customers.

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Appendix

FinTech and its wide range of penetration in different domains

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Funding activities across FinTechs in India

Funding received by Digital Payment FinTechs

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China’s Building Block Bank By: Sanika Bhalekar (IIM Ahmedabad) When Deng Xiaoping said, “hide your strength, bide your time”, never did he imagine that his dictum would be taken so seriously by his forerunners. China has indeed been a hibernating dragon, accumulating power, and strength, one which has emerged as a serious player in the world economy due to its strong financial situation. The Asian Infrastructure Investment Bank (AIIB) is one of the country’s newest attempts at taking control of the world economic and political order, bypassing established giants such as the US and Japan. The AIIB is another addition to the growing number of Multilateral Development Banks that have been established in recent times. It is an international financial institution that aims to support the building of infrastructure in the Asia-Pacific region. One may think that the existence of many other similar institutions, established for the same purpose, may make the AIIB extraneous, but there seems to be a huge network of factors that have led to this interesting development. A substantial part of this mystery may be solved with the following piece of information: right from proposing the idea of AIIB to promoting it to other nations to having a 30% stake in it, China has played a hyper-active role in the establishment of the new bank, so much so, that even the headquarters are in Beijing. The official reason given by China is that it aims to bridge the gap between the requirement for funds and the availability of funds for infrastructure development. However, China’s lack of patience with due to the slow pace of reforms and insufficient representation in the US-Japan dominated institutions, along with its large stock of foreign exchange earned through exports is more believable. Given the presence of AIIB, the World Bank-Asian Development Bank (ADB) duo would not be able to neglect the Asian demand for infra finance. Apart from the obvious reasons, China seems to have a few ulterior motives behind this initiative. Firstly, it may be an effort to be on good terms with its neighboring countries which were estranged due to its aggressive territorial expansion attempts. Further, these investments would give China a certain amount of political power over the countries receiving the loans. Lastly, being supportive of the development of other countries may attract AAA countries to associate as founding members. Other countries have had contrasting attitudes towards the new bank. While the US has expressed concerns over the governance structure and the condition of the environment if China’s policy is followed, the UK was the first Western country to become a founding member, followed by France, Germany and Italy. Australia and South Korea applied for membership despite USA’s efforts against the same. Finally, 16 of the world’s 20 largest economies have participated. Participation of the traditional allies of the US points to the gradual isolation of the US in the world order, something China would love to see happen.

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The importance of the political side of the story, while important, does not provide a complete picture. The economic impact of the Bank may be double-edged and controversial depending on the decisions taken by China through the AIIB. The ADB has predicted that US$5.36 trillion will be needed annually for development of infrastructure by 2025. Asia has an abundance of resources that can be utilized to meet these financing needs. However, the requirements for funds are too diverse and widespread, with a variety of projects which need funding from various sources. This is where the AIIB steps in. It will facilitate the routing of funds in the direction where they are most beneficial. China tops the list of countries with the highest foreign exchange reserves, amounting to about 3.3 trillion USD. These reserves are more than enough to cover its imports for 20 months, far more than the ideal six months. However, most of this foreign exchange -about two-thirds- is held in the form of US-dollar dominated financial assets such as US Treasury Securities. This is risky since inflation in US will directly reduce the repayment value to China. Also, the return from these investments is lesser than the return China will get from participating in the AIIB. This forms the basis of China’s decision to take up the largest stake in the AIIB and this increase in return balances out the negative impact of the decrease in domestic investment in China. Finally, there have been instances of the World Bank pushing for the West’s interests in return for providing loans to countries at low interest rates. Similarly, China might start lobbying for the trade of its goods in return for loans provided by the AIIB since it has the highest voting power. While that is undesirable, one cannot ignore the possibility of China taking undue advantage of its position. To conclude, all these factors point to the fact that the AIIB is definitely an attempt by China, possibly a successful one, to compete with the established institutions dominated by the West. For now, the effects can only be forecasted. The actual results will depend on China’s ability to take pro-active and correct decisions, promote equality, ensure that the bank has a significant effect on the current situation, thus preventing it from becoming “just another bank”.

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Unlocking Digital Finance By: Simran Bansal (Asian Business School) A widespread use of digital finance could boost the annual GDP of all emerging economies by $3.7 trillion by 2025[ See Digital Finance for All, McKinsey Global Institute, 2016] while there is a US$380 billion opportunity in annual revenues for banks that draw more people into the formal sector[ . Billion Reasons to Bank Inclusively, Accenture Banking, 2015]. But it can be useful to take a broader perspective, and think about the motivations of real people living real lives. Because, unless they see a compelling reason to change habits, they will stick with existing products and providers. Most people transact in informal sector. It is useful to remember the inherent disadvantages of informal products, characteristics that can never be fixed – unless of course, the providers were to move to the formal sector. The informal sector offers a shoddy service. Some providers may offer a lower-cost or more convenient service as they are free from the burden of regulatory compliance. On one hand, where formal providers may be seen as remote and impersonal, informal sector since they are embedded in the local community may benefit from high levels of trust. However, there are certain attributes which informal providers do not have or would find hard to replicate. And this means that the formal sector should benefit from some inherent competitive advantages as follows: Unlocking legal protection: This is the big one. Outside of the formal sector, there is no formal right of recourse. Money lost is unlikely to be refunded. There are no binding terms and conditions. No clarity over rights, responsibilities, and liabilities and no guarantees against over-charging or cheating. Unlocking certainty: Products from the informal sector are likely to be shrouded in uncertainty. There will seldom be a price-list, or a contract, or any accompanying literature. There may be uncertainties about charges, and liabilities, and timescales. Unlocking transparency: One characteristic of a healthy financial services marketplace is choice. And, with choice, comes the ability to compare providers and select appropriate products. In the informal sector, choices are likely to be more limited, with little basis to make like-for-like comparisons. Unlocking access: The informal sector is locally-based. People are restricted to the providers who happen to be operating nearby. With digital finance, distances become less relevant, while use of digital services leaves a ‘footprint’ that can unlock opportunities to access products that require payment or credit history. Unlocking flexibility: In the formal sector, prohibitions against restrictive practices mean customers are unlikely to be “locked-in” to a particular product or provider. In the informal sector, there will often be less scope for people to opt-in or switch-out. Unlocking scale and scope: Financial services tend to be a volume business. The greater the scale, the greater the efficiencies, and (in theory at least), the lower the prices. The informal sector is unlikely to summon up enough scale to compete, price for-price, against a volume player.

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Unlocking convenience: One of the big benefits of bank accounts and digital finance is the convenience they can bring. People without accounts often travel long distances to pay bills. They spend money getting there. They stand in line when they arrive. When, all that time, they could have been more productive. Unlocking “syndicated” trust: Informal products tend to be deeply embedded in the local community, so are trusted. But what happens when populations change or become more transient? With the formal sector, there’s less reliance on the “earned” trust, as trust can be “syndicated” via brands and regulatory protections. The advantages of a well-functioning financial services market are immense. The factors preventing consumers from migrating from the informal to the formal financial services sector are as below: The identity crisis: 1 billion people globally face challenges in proving who they are because they lack official proof of their identity, and close to 40% of the population aged 15+ in low-income countries do not have an ID[ Identification for Development (ID4D) Annual Report, 2018]. Without ID one cannot take usage of formal financial sector. The Illiteracy Factor: 781 million adults globally are thought to be illiterate, more than three quarters of whom live in South Asia, West Asia and sub-Saharan Africa[ CIA World Fact Book, 2015]. With a digital skill set, untapped talent with global work opportunities can be tapped thereby empowering financial inclusion. The Issue of access: For adopting formal financial services, it’s essential to have a branch nearby, have a reasonably capable mobile phone or benefit from reasonably reliable mobile reception. Yet, 22% of adults without an account say that distance to a financial institution is a barrier (rising to 33% in countries such as Brazil, Indonesia, and Kenya, and 41% in the Philippines)[ 2017 Global Findex Database]. Similarly, a third of unbanked adults (equating to 560 million people) have no mobile phone. And those that do will often have a basic feature phone and, in remote areas, gaps in coverage are commonplace. The Gender divide: Another important consideration is a deep gender gap, which could widen if mobile and digital technologies become the primary delivery channel for financial services. Women are much less likely to have made or received a digital payment, more likely to have used informal financial products, and less able to come up with emergency funds in the face of an emergency. Regulation: On one hand, regulation provides certainty; security and legal protection for consumers while o other it determines which institutions can participate, to what extent, and under what terms. Regulators are really struggling to cope up with the speed of change in the market. It’s difficult for a regulator to know technology as a Fintech. Sometime it becomes difficult to strike the right balance between protection and innovation. Access to Usage issue: A Large proportion of accounts are either completely dormant or are ‘letterbox’ accounts (emptied as soon as funds are paid in). Thus, opening an account is a means to an end, not an

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end in itself. The journey to financial inclusion isnâ&#x20AC;&#x2122;t about opening accounts. Itâ&#x20AC;&#x2122;s about linking financial access to financial health - by providing accounts that are easy and attractive to use and that contribute to the financial health of the account holder by making it easier to find buyers or get paid more quickly[ The Next Frontier in Financial Inclusion: Moving Beyond Access to Usage, Mastercard, 2018]. When the competitive advantages are leveraged and the barriers are shattered, digital economy can unlock a bright future for every citizen.

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Developing a Manufacturing-based Economy by capitalizing on manufacturers exodus from China, Workforce & Policies By: Abhijat Das (Delhi Public School Hyderabad) A study conducted by Japanese Financial Group Nomura showed that out of the 56 companies that relocated their production out of China between April 2018 and August 2019, only three went to India. China’s increasing labour costs, complex regulations and increasingly unstable geopolitical situation with the trade wars and the current pandemic are forcing many manufacturers to move their production elsewhere. Why haven’t these companies moved their production to India? This article discusses various reasons behind this problem and provides solutions to make India the largest manufacturing hub & manufacturing-based economy of the world. Elvis has left the Building: There has been an enormous exodus of manufacturers out of China due to Trade War with USA and the pandemic has added fuel to the fire. After three decades of building up manufacturing bases in China, Larry Sloven of Capstone International moved its production base to Thailand due to increasing costs (25 percent tariff on lighting products on the exports to USA). French scooter manufacturer Globber has been experiencing 15 to 30 per cent higher costs at its plant in southern China and is planning to move to Vietnam. Estonian manufacturer Apple, Google and Microsoft have been scouting to move some of their hardware production from China to Vietnam and Thailand. Google has also asked a manufacturing partner in Thailand to prepare production lines for its smart home products. Japan’s Nintendo is planning to shift a portion of its video game console production from China to Vietnam. Taiwan’s Pegatron (Apple partner) is moving to Vietnam from China. Electronics company Sony shifted its smartphone production from Beijing to Thailand. Vietnam has been the biggest winner with many US companies shifting to a reliable supply chain alternative for manufacturing. Imports to the US from Vietnam surged by 36%, or $17.5 billion, to more than $61 billion in 2019. The Japanese government by earmarked a $2.2 billion of stimulus package to aid Japanese manufacturers to shift their production lines out of China and back to Japan.

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Shift of Supply Chain from China Complete shift of supply chains from China is not going to happen as China boasts of a complete spectrum of supply chains for products ranging from electronics to apparel to toys to smartphones to medical equipment. The domestic Chinese market has been a major factor for global companies to invest there. With wages rising sharply in China due to labour shortage as a result from the one-child policy, it seemed obvious that China would give up a large share of labour-intensive production.

Why India is not benefited much from Manufacturers Divorce with China? There is lot of buzz by Indian Government that many companies will move their Manufacturing operations from China to India. But most manufacturers that are leaving China are either moving or planning to move to Vietnam, Thailand, Philippines, European Union etc. A large population is not a necessary precursor to attract manufacturers. The following are a few of the reasons why many of them are still not choosing India as a preferred destination and how India could possibly attract them. 1. Modern product manufacturing requires a highly specialized workforce: India has a surplus of labour, a relatively younger population, though the labour remains largely unskilled, which can be attributed mainly to the focus on academics and lack of practical knowledge. Providing focused specialized training in product manufacturing is necessary if India is to take advantage of this opportunity. They need to be trained in manufacturing processes for the manufacturers that India is trying to attract. The lack of a vocational training system like in Germany and Austria is one of the main problems. Germanyâ&#x20AC;&#x2122;s dual-track vocational training program, known as the VET, is the route that around half a million apprentices in Germany take to become a skilled professional every year. The dual-track VETâ&#x20AC;&#x2122;s two components are: classroom study in specialised trade schools and supervised, on-the-job work experience. India should strive for VET-like apprenticeships to have specialized manufacturing workforce to attract manufacturers.

2. Productivity: Our labour productivity is abysmally low compared to other South Asian countries like Vietnam or Thailand. Our work culture needs a top down mindset change. Labour laws should be

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changed to give the companies the leeway to strictly enforce discipline within the factory premises and demand higher productivity.

3. India must provide more tax incentives for investing in the desired categories of manufacturing it hopes to attract. It must also make it easier to import components.

4. Indiaâ&#x20AC;&#x2122;s ageing infrastructure needs a massive push to create a modern and robust one. This calls for investments in steady power supplies, more & efficient ports, good roads, more modern airports, and greater ease in customs clearance.

5. Corruption, bureaucracy, political interference, unpredictable tax regime etc. are some of the other hinderances which needs to be fixed for attracting FDI in manufacturing sector.

6. Have a plug and play kind of ready-made industrial parks with necessary clearances and manufacturers need based training institutes co-located in the same industrial park. Self-contained Industrial cities with space for manufacturing, modern commercial, educational, residential, and social infrastructure will be attractive. Roads, Buildings and Social Infrastructure should be world class with a pollution free environment. Manufacturing facilities should be built with highest standard to keep it pollution free so that the people and expatriates who will work in those plants would like to live in the vicinity.

7. Labour reforms are necessary in India given that India has a plethora of labour laws and they hamper businesses.

8. Attract Manufacturing Companies in China that already have some manufacturing operations in India by reducing their output in plants in China and scaling up in production in India. Government should give them tax breaks & cheaper land for expanding their existing operations.

9. Industrial effluent treatment should have very modern infrastructure. Government should provide common effluent treatment plants in the industrial park.

10. Cut down the number of approvals required for FDI. Currently, you must have 20 to 25 approvals to start a factory which is one of the hindrances for foreign investors. We only have â&#x20AC;&#x153;single window clearanceâ&#x20AC;? as a slogan but not in action. India should make it easy for the investor to get clearances in

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a relatively shorter time with a dedicated government official helping them without them moving around from door to door.

Silver-lining for India:

CEO of Hong Kong based LI & Fung, recently said that Vietnam is effectively sold out in terms of taking on new manufacturing work. And Vietnam is years behind China in terms of overall infrastructure, and supply chain maturity. This is an opportunity for India to step in become a preferred alternative manufacturing destination. Indian smartphone manufacturer Lava has said it will shift the production base of all its phones meant for exports to India from China. Samsung and Apple are already making some of their mobile phones in India and more of production can be moved to India. Recently, Samsung closed their factory in Huizhou city and opened a new factory in Noida. India is developing a land pool nearly double the size of Luxembourg to lure businesses moving out of China. Thereâ&#x20AC;&#x2122;s still a relatively long way to go before India attains global influence as a manufacturing hub.

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Resources: •

Bringing Manufacturing Back to the U.S. Is Easier Said Than Done in Harvard Business Review(HBR) by Willy C. Shih • Why manufacturers are not rushing into India in Livemint by Lee Kah Whye of ANI • China’s manufacturing exodus set to continue in 2020, despite prospect of trade war deal in South China Morning Post by - Finbarr Bermingham • Apple, Microsoft, Google look to move production away from China. That’s not going to be easy in CNBC by Arjun Kharpal • India is chasing an elusive China dream in Livemint by Rahul Jacob • India may become new global manufacturing hub as coronavirus crisis ends -Zee News • Are Electronics and Automotive Manufacturing companies shifting their base from China to Vietnam? In www.aranca.com • How coronavirus will fuel manufacturing exodus from China in India Today by Sai Kiran Kannan (Singapore) • Supply Chain News: Companies Moving Sourcing Out of China, but Vietnam, other Countries not Ready for Prime Time in SC Digest

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The Dangerous Trend Towards Passive Investment in the Share Market By: Vistar Kalra (The Hong Kong Polytechnic University) It is near impossible to live in India and not have seen or heard a mutual fund advertisement. It seems like they are ran and presented during every advertisement break, whether it be a cricket match, the news, or even in cinemas at the start of films. With all the media that we consume dayin-day-out, we are pumped about news with the newest, safest, greatest mutual funds. Passive investments have become a norm in the modern investment culture, for both institutional and retail investors. It undoubtedly has its positives, benefits, and advantages, however, share market investments are going towards a dangerous trend in overinvestment in these sorts of funds. Excessive consumption of anything will be negative, but passive investment itself can lead to grave consequences for all types of investors. So, what is passive investment? To gain a clearer understanding of this, one can both understand what passive investment is and also distinguish it from active investment. Passive investment is a strategy that focuses primarily on long-term success (Krueger, 2020). It is also referred to as “’buy and hold’ philosophy” (Chris Thompson). Passive investors focus on passive funds such as mutual funds, index funds, and exchange-traded funds. The specialty of these types of funds is that they effectively invest in companies for you. They act as the middle party for the investor or trader. These sorts of funds tend to follow or track different companies, sometimes within indices, by creating their portfolios upon grouped companies. For example, one of the most popular index funds is the Dow Jones, which has stocks of 30 of the biggest American companies. While the company managing these funds have their freedom and there are special exceptions, these sorts of funds tend to choose the biggest, most established, and successful companies, that provide the most consistent and safest returns. Investors do not have to go in the open market and purchase individual shares or securities of these firms for their portfolio, they can invest in a fund that contains all the stocks of such companies, also reducing the unsystematic market risk from containing only shares from one of these specific upward trending companies, by diversifying into many. These funds will essentially manage that specific portfolio of these companies for the buyer. The bottom-line is, passive investments are investment within funds that typically create a portfolio for investors to purchase, so that they no longer have to make their portfolio of individual companies, and can continue to get safe and consistent returns, as the funds are both diversified and companies are unlikely to collapse or capitulate (Chris Thompson), (Krueger, 2020).

Active investment, while certainly can be done with a long-term view, tends to be more short-term based. Active investors are a lot more independent in terms of purchasing shares and securities. However, they also have a greater potential of return, of course with the significantly greater risk that they hold. Active investors may focus on volatility in intra-day or other short-term measures but have to be consistently on and watchful of the markets, a luxury only passive investors can afford when their various funds are managed by someone else. The benefit, however, that active

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investors hold is that they can make great returns, surpassing the safe yet only average returns that passive investors who invest in these safe funds expect to gain, through several ways. Whether that be through intra-day gains, other short-term volatility, high growth yet high-risk stocks, microcap companies, among others, that passive investors will be unable to gain as their long term safe investment strategies cannot capitalize on these short term profits, as it is unlikely for one holder to have too many of one company to start with, and the fact that the companies within the fund are unlikely to have volatile changes anyways. Furthermore, that they cannot exercise selling specific shares that are having short-term volatility for the positive, as they are part of the fund, they have invested in (Krueger, 2020).

Given this, one might wonder, what are the benefits for passive investment – investment in funds such as mutual, index, and exchange-traded? This investment mechanism has become very popular in recent times. In fact, not just in India, but Mutual Funds “are the most popular investment choice in the U.S,” as well (Palmer). The biggest benefit that these sorts of funds provide is that, while mutual funds do have greater scope for exploration, passive investment funds are significantly safer than investment into singular or even a couple of companies. A reason for this certainly can be that many of these funds track either indices or another grouping mechanism for the biggest companies on the stock exchange, such as the SPY ETF, which tracks the S&P 500 Index, which contains the 500 biggest companies on the American stock exchanges. The primary reason, however, is with the investment in an effective portfolio, diversifiable unsystematic risk is eliminated. No longer do investors need to concern themselves with the risk that one will bear from selective to that singular company. The only risk that remains is the genuine market risk, that affects all securities and cannot be eliminated, subject to form of investments. To reiterate, investing in a passive fund is investing in a portfolio itself. Another great reason is that these funds tend to save both explicit and implicit costs for investors. Not only do investors only have to typically pay once for investment within the fund, and they do not have to spend the time choosing between individual stocks to maximize returns and optimize their risk levels.

There now lies a major issue with the popularity of passive investment, some even going as far as drawing parallels between this and 2008 financial crisis. This trend has created a bubble for passive investment. Using simple supply and demand economics, the more popular these funds are getting, the more their prices continue rising. This will artificially, overvalue these funds. Their prices no longer are being increased from technical and fundamental reasons, but the supply and demand of the fund. The theoretical evaluation of such a scenario includes the grim scenario of us reaching a point, perhaps when passive investments do become the norm in India and the rest of the world, much like it is the US, where a strong enough cash flow lies within these funds, continuingly “misevaluate[ing]” these funds (Earlyretirementnow.com). The great Michael Burry, who caught the financial crisis of 2008, said “Index Funds Are Like Subprime CDOs,” the primary derivative that caused the catastrophe (Stevenson). The investments into these funds are going to come in two ways, from capital outside the market, and from capital within the market, where the latter

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will be far more significant. Not only are the influx investments driving up the value of these passive investment funds, in the same vein, they drive down the value of individual securities, due to lack of demand and oversupply. It can very well all come crashing down if it truly reaches a stage, such as that of bitcoin, when its fundamental intrinsic value is far below the value the free market has made it. Ultimately, that’s what decides the prices of most if not all assets and even liabilities. If behavioral finance and economics is acting one way, the power of the people is far too great, because supply and demand is what truly controls price.

Resources • • • • •

Chris Thompson, CEPF®. "What Is Passive Investing, and How Does It Work?" SmartAsset. SmartAsset, 05 Feb. 2020. Web. 31 July 2020. Earlyretirementnow.com. "My Thoughts on the "Passive Investing Bubble"." Early Retirement Now. N.p., 24 July 2020. Web. 31 July 2020. Krueger, Pam. "Active vs. Passive Investing: What's Best for You?" N.p., 29 Jan. 2020. Web. 31 July 2020. Palmer, Barclay. "Mutual Funds: Advantages and Disadvantages." Investopedia. Investopedia, 20 Mar. 2020. Web. 31 July 2020. Stevenson, Reed. "'Big Short' Hero Explains Why Index Funds Are Like Subprime CDOs." Google Search. Google, n.d. Web. 31 July 2020.

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Financing the Future Footprint: The effect of carbon on a companyâ&#x20AC;&#x2122;s finances By: Divya Gautam & Vyom Aggarwal (XLRI Jamshedpur) The onset of climate change and the buzzword of sustainable development has made businesses stop and take a look to ascertain what will drive profitability in the coming decade. For companies trying to maximize their bottom line in a world entrenched in climate change and associated policy changes, it is crucial to first conduct a vulnerability analysis that makes them aware of their current and future scarce resource requirements, their current carbon footprint, and a risk assessment to ascertain the challenges that may be posed by location and policy changes.

For optimizing investment practices, there is a preliminary need for comprehensive risk assessment. Mainly, companies should be worried about the level of regulation and reputation risk they face. While regulation risk is more about compliance with governmental policy, it is becoming increasingly important with countries imposing carbon emission taxes, withdrawing certain subsidies and implementing carbon trading schemes. Reputation risk is the risk associated with a negative customer perception due to certain environmental damage or positions taken by the company. This is directly linked to profitability, market share and is often the major risk that is posed. A simple economics driven approach to assessing climate related challenges could be to analyze the demand side and supply side forces that are under threat by impending changes in the environment. For example, questioning if there will be a drop in demand due to certain upcoming regulations, or, is there an approaching resource constraint that could hamper input sourcing, are relevant questions to ask. All this analysis is directly linked to the financial statements of the company, and in order to ensure that the current or future cost of emissions doesnâ&#x20AC;&#x2122;t become too high, companies are incorporating the practice of internal carbon pricing. Internal carbon pricing assigns a monetary value to carbon dioxide emissions, factors in the cost associated with each emitting business unit and prompts better investment decisions. Assigning this value to both avoided and emitted carbon emissions helps identify risks and opportunities in the organizationâ&#x20AC;&#x2122;s value chain and operations. A better business strategy can be formulated along with resource reallocation towards renewable energy procurement and energy efficiency improvements. Essentially, internal carbon pricing is a way for managers to understand how to maximize ROI, and then make investments accordingly.

Besides internal carbon pricing, another financial tool being used are green bonds. Businesses are encouraging institutional investors to buy green bonds that can finance the design of low carbon emitting products and cleaner energy resources for the business. The capital raised by the issuer of green bonds is utilized for environment friendly business activities. The green bond market, while only a fraction of the global bond market, is growing rapidly, especially in Europe. Cumulatively, $580 billion of green bonds were traded in 2018, as per Bloomberg New Energy Finance reports. Most of the green bonds are investment grade and are sold in a price range more or less equivalent to that of conventional debt at issuance. European

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green bonds had an average rate of return of 0.34% in 2018, close to the overall 0.41% given by the investment grade market, as per recent Bloomberg-Barclays Bank indexes. But growing demand for green bonds, increased awareness about sustainability and scarcity will potentially further push up prices in the secondary bond market. While the USA is the largest source of green bonds (led by giant Fannie Mae), local governments and the World Bank also take up a fair share.

Carbon Credit and Trading Carbon credit as a term first appeared in the Kyoto Protocol of 1997, signed by 180 nations across the world. A carbon credit is a certificate or a permit which allows the holder (an individual or an organization) to emit carbon-di-oxide or other greenhouse gases. The permit sets the right to emit one ton of hydrocarbon fuel (mainly carbon-di-oxide) or equivalent amount of other greenhouse gasses and was brought in with an attempt to mitigate the risk caused to the greenhouse gases into our atmosphere. Each nation (which further distributes in into its companies) is given a definite number of credits with which they can trade, and the credits are distributed in such a manner that a total worldwide emission of the greenhouse gases remains under control. Under Carbon trading, if an organization is emitting less than what it is allowed, it can sell the unused credits to other companies that have already utilized their allowed amount. For such a trade to take place, it is paramount that the penalties imposed by the government are much more than the credit rates, so that companies don’t default or prefer to pay the penalty rather than buying the credit from the market. The rules for such trading were set up in the Kyoto Protocol which came into effect in 2005 and was revised in 2012 as the Doha Agreement and further revised in the Paris Agreement in 2015. Carbon trading serves as a source of extra revenue for many companies who have taken the initiative to reduce greenhouse emissions. The market of carbon trading has been growing steadily over the past few years and was at $176 billion in 2011 and is expected to exceed $1 trillion by the year 2020. Most of this is from the European Union as it has capped emissions for all the companies doing business within its territory. The major platforms that allow carbon trading are: ·

European Energy Exchange (EEX)

Power Next

NASDAQ OMX Commodities Europe

The number of credits available in the market is fixed and each reduction in the total amount is the goal set to reduce either the carbon or greenhouse gas emissions. This reduction in the amount of credits and the gradual increase in price motivates and puts pressure on the participating organizations to invest into innovations and get more sources of cleaner fuels and energy and thus reduce their CO2 emissions. Carbon pricing methodology is used with carbon credits with the idea to reduce emissions elsewhere rather than to invest in the same country in which the operations are taking place. For example, a car manufacturer in the US has very energy efficient and innovative clean technology

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and wishes to invest the same in India. The same funds will help to avoid a larger amount of carbon in emerging or developing markets where the emission reduction costs are lower. The cost of carbon credits is dependent on a number of factors like market and economic value, supply and demand, type and size of the project and many more. There is nothing such as a common price and a huge variation from 3.50 EUR to 28.5 EUR can be seen in the market. The variation in price is seen in small time periods and over continents as well. The policy of carbon credits and selling them in the market incentivizes the companies to invest in cleaner technologies and sustainable products so that it becomes financially useful to them.

New Currency- Carbon Emission? With the trend shifting from regular bonds and hard currencies, followed by the advent of digital currencies like Bitcoin, are we ready to move towards a greener currency? Carbon Trading is also a new form of currency, although born more out of necessity than creativity. It is a currency with a value attached to save the planet and therefore could be the currency most valued in the future!

Resources • • • •

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Porter, M., & Reinhardt, F. (2007). Climate Business | Business Climate. Retrieved 4 January 2020, from https://hbr.org/2007/10/climate-business-_-business-climate Business Strategies to Address Climate Change | Center for Climate and Energy Solutions. Retrieved 4 January 2020, from https://www.c2es.org/content/business-strategies-toaddress-climate-change/ Pronina, L. (2019). Bloomberg - Are you a robot?. Retrieved 7 January 2020, from https://www.bloomberg.com/news/articles/2019-03-24/what-are-green-bonds-and-howgreen-is-green-quicktake CDP. (2016). Embedding a carbon price into business strategy [Ebook]. Retrieved from https://b8f65cb373b1b7b15febc70d8ead6ced550b4d987d7c03fcdd1d.ssl.cf3.rackcdn.com/cms/reports/documents/000/0 01/132/original/CDP_Carbon_Price_2016_Report.pdf? Carbon trading - SourceWatch. (2020). Retrieved 7 January 2020, from https://www.sourcewatch.org/index.php/Carbon_trading Cap and Trade - History of Carbon Credits and Carbon Trading. Retrieved 7 January 2020, from http://www.altfuelsnow.com/carbon/cap-and-trade.shtml Picincu, A. (2018). How to Sell Carbon Credits. Retrieved 7 January 2020, from https://bizfluent.com/how-4965822-sell-carbon-credits.html Carbon credit. Retrieved 7 January 2020, from https://en.wikipedia.org/wiki/Carbon_credit Imagehttps://www.google.com/url?sa=i&url=https%3A%2F%2Fcarbonmarketwatch.org%2Fpu blications%2Fcarbon-markets-101-the-ultimate-guide-to-global-offsettingmechanisms%2F&psig=AOvVaw1ox0FC3HoLqXbH3n8llskO&ust=1595509647142000 &source=images&cd=vfe&ved=0CAMQjB1qFwoTCIDzkOX24OoCFQAAAAAdAAA AABAD

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