Arbitrage Magazine - September 2022 - Finance & Investment Club | IIM Rohtak

Bond

Buy Now, Pay Later: Flourish with Gen Z demand or fade under RBI Scrutiny

By: Jerry George and Saumyata Arora (IIM Trichy)

Introduction

Credit is an important element in trade and commerce. Over the years, credit has taken different forms like loans, debentures, bonds, credit cards etc. Buy Now Pay Later (BNPL) scheme is one form of credit which can be traced back to 19th century, where consumers purchased expensive goods and paid it in instalments at a later point in time. With the advent of technology, BNPL itself became a new business model, where lot of fintech companies integrated the system with e commerce where the customer is able to access instant credit at the point of sale. It is a kind of short term financing that bridges the gap between the income of the customer and their needs, and it is mostly provided on an interest free basis. The major players in the Indian BNPL market include LazyPay, Zest Money, Amazon Pay Later, Flexmoney, Simpl etc. This system has revolutionized the retail segment by inducing customers to buy more and often beyond their limits. When the top line of firms increase due to BNPL schemes, we should not close our eyes to the moral hazard it can create. It should be noted that availability of easy credit and buy now pay later schemes was one of the reasons for the Great Depression in 1929.

How Companies Use BNPL as a Strategy

BNPL is a financing option for point of sale that has gained popularity recently, especially with younger demographics. This can be proved by prospect theory.

1. Off card financing solutions

2. Virtual rent to own models

3. Card linked installment offerings

4. Vertical focused larger ticket plays

5. Integrated shopping apps

How the front runners approach their Go-to-Market strategy?

Klarna To reach potential BNPL clients, Klarna acquired the British price comparison website Price runner. The likelihood that you are interested in BNPL is higher if you give price a lot of thought. Additionally, when you intend to make a buy, you're more inclined to compare pricing, a wonderful match.

Affirm has made early investments in solid alliances and enables the Shopify Shop Pay and Amazon BNPL services.

Afterpay Block purchased Afterpay in January 2022, and it now benefits from its mature ecosystem. Block is the owner of the music streaming service Tidal, Cash App, a supplier of mobile payments. This offers a solid foundation for connecting to the consumer and merchant networks using a single BNPL solution.

Gen Z

Generation Z (aka Gen Z, iGen, or centennials), refers to the generation that was born between 1997 2012, following millennials. The implications of growing up in a super active technological environment shifts youth behaviors, attitudes, and Lifestyles.

User habits

● Demands Sustainable Shopping

● The mobile-first, digitally native generation

Genz characteristics

Young people nowadays are statistically considerably less likely than their counterparts a decade ago to pursue the humanities and much more likely to study STEM (Science, Tech, Engineering, or Math) disciplines.

Genz Purchasing Power

The purchasing power of Generation Z is rising. Their purchasing power is pegged at nearly $140 billion in 2022. However, a 2021 Bloomberg analysis shows that they currently have $360 billion in disposable money, more than double what was predicted three years earlier.

What is the source of all this money?

They produce $229 billion in annual salaries alone from full time employment. With the help of side jobs, this group generates roughly $40 billion annually

● Gen Z Has $360 Billion to Spend, Catch Is Getting Them to Buy

● Report shows instead of spending they’re saving and investing (Bloomberg)

Why Genz and BNPL go hand in hand?

Convenience BNPL payments are processed quickly. The trip (faster checkouts) is just as significant as the ultimate purchase (faster delivery)

Lack of Alternative Credit: Since many Gen Z are first time borrowers, banks will not issue them a credit card without a guarantee. First time borrowers have access to credit thanks to BNPL products, which use alternative data and artificial intelligence to analyse a user's profile and extend credit appropriately.

Easy Refunds: If a customer later decides they want to cancel the order, the e commerce company will issue a refund; however, it will take time once the money reaches the customer's bank account. But in BNPL programme, the refund is processed right away.

Easy EMIs: A lot of Gen Z and millennial customers utilise BNPL for minor purchases, which enables them to divide the cost into manageable EMIs that may be paid over three or more months of an interest free period. People are now able to purchase products that were previously beyond their price range.

Existing Integration: A QR code payment system has been implemented in many offline establishments, including Kirana retailers. Because of financial apps like MobiKwik, Paytm, PayU, consumers who make offline purchases can also take advantage of BNPL. It is integrated with the purchaser's e wallet, like, Paytm

RBI Regulations on BNPL Schemes

The BNPL industry in India showed a massive growth of 569% and 637% in 2020 and 2021 respectively. Moreover, the thin line between credit cards and BNPL schemes was reducing. In India, only banks are allowed to issue credit cards; even an NBFC is not allowed to issue credit cards. This required BNPL companies to shift their business model and shift to Prepaid Payment Instruments. The prepaid cards issued were topped up by a credit line or loan from an NBFC. The cards were issued from a bank, but the credit line was evolving from NBFC arm of the BNPL companies. For example, Slice came up with its prepaid cards, which was issued by State Bank of Mauritius and credit line coming from Quadrillion Finance, which is the NBFC arm of Slice. This was clearly a case of bypassing the formal banking system. Moreover, the number of cards issued by the fintech firms was around 2 million as compared to 1.5 million credit cards issued by banks. Due to these circumventions, RBI banned PPIs with credit lines.

RBI Governor Shaktikanta Das had told that BNPL also comes under lending activity. So it implies that the fintech firms offering these services will be under the supervision of RBI in the future. Earlier the KYC process was diluted by the fintech firms and easy credit was provided even to customers whose creditworthiness is doubtful. Several complaints were registered related to loan disbursement without consent, KYC discrepancies etc. It was also revealed that there were 1100 unauthorized digital loan providers in India. The proliferation of BNPL schemes will create a situation of overleverage in the market and this can lead to another financial crisis, if not appropriately managed.

Conclusion

Even though BNPL schemes have been showing robust growth in recent years, especially among the Gen Z population of India, their legal validity was always in question. The moves made by these companies to circumvent the regulations have been put on a hard stop by the RBI. These regulations have halted the business model of these firms. The moral hazards or BNPL schemes will be unknown to the users. The audience these firms are targeting is mostly the young population who will be finding more utility in instant gratification rather than finding value in delayed consumption. This euphoria in consumption can create a lot of chaos in the market. One of the causes of the Great Depression of 1929 was the idea of buy now pay later which was adopted as the motto of the majority of the population at that time. The regulations imposed by the RBI will be helpful to both society and the fintech companies to reinvent their business models. Unsupervised lending will only lead to larger problems and this has been evident from history. So it is advisable for the BNPL schemes to reinvent their business models, leading to responsible lending.

References

1. Buy Now Pay Later, Wikipedia.org

2. Buy Now Pay Later: All You Need to Know, Bank Bazaar

3. Consumer Economy, USHistory.org

4. BNPL: Five Business Models to Compete, McKinsey & Company, July 29, 2021

5. BNPL: A new Payment Standard? Fintech Ruminations, 27 October 2021

6. RBI sets the cat among the BNPL pigeons, Finshots, June 23, 2022

7. The new BNPL: How will the busines change post RBI crackdown, Your Story, July 25, 2022

Buy Now Pay Later Scheme

By: Saloni Parmar (Kamla Raja Girls PG College)

The Buy Now Pay Later or BNPL segment is growing at a mind boggling growth rate of 569% in 2020 and 637% in 2021. BNPL segment is expected to #1 in the world by 2026. According to Indian Consultancy firm Redseer by 2026 BNPL users in India are expected to grow from present 10 15 million to 80 100 million. The company also predicts that India's BNPL market will grow more than double from current US$3.5 billion to $45 $50 billion by 2026.

According to a report by Zest Money,'The India; Buy Now Pay Later Report 2021' the number of millennials and genZ customers are going to increase by 2x and 3x respectively. That means the growth of the BNPL segment is going to be driven by the younger generation or the genZ of India which goes in line with the global trend.

This fintech segment looks promising and is growing at a rapid rate, but after the recent RBI circular regarding PPI gave a major blow to fintech companies in the BNPL market. The question is why is RBI so sceptical about this segment?

Before the RBI's concern first let's see why is this segment growing at a rapid pace? What is the problem that these companies solve? And more importantly what are the benefits that these fintech companies like uni and slice etc bring on table for their customers?

Now you see only 3% of India's population owns a credit card, the rest 97% don't access credit card and its facilities. When we talk about the younger lot i.e. population below 25 years of age;

the reason why they can't get a credit card can be low income, no credit history etc. This is where the BNPL model comes in because this is the audience that BNPL companies target i.e. people below 25 years or so.

The reason why GenZ chooses BNPL is:

Lack of alternate credit: Many GenZ are first time borrowers with no credit score. Banks and traditional institutions obviously do not lend to people with low credit scores and that's where BNPL acts as an alternative. Companies like slice and uni use AI to study a user's profile and give credit accordingly. They give credit to NTC (New to Credit) borrowers.

Easy EMI: This feature of BNPL gives customers accessibility to products that were earlier out of their reach. In order to pay a EMI they also get 3 or more months of interest free period with condition that the instalments are paid timely.

Convenience: BNPL companies give seamless onboarding experience to their companies, offer easy repayments, increase their affordability and most importantly enable them to get credit in just a few seconds.

Flexibility: BNPL gives the customers perfect flexibility to spread the cost of their purchase at different intervals of time, say 3 months or so. In this way it helps them manage their finances better.

BNPL enables customers to make purchases in spite of having low income, this increases the probability of sale so sellers make money and Fintech of course makes money so why does RBI have a problem?

This brings me to the risks involved with BNPL:

Impulsive spending: Buying things you don't need with money you don't have. With BNPL a person may experience a lot of things becoming affordable. He may think he will buy stuff on loan and pay through EMI but this often results in overspending. You end up buying stuff you didn't really need.

Debt Trap: yes, BNPL cards offer interest free period but it is limited. In case you didn't pay EMI on time then default interest and late payment charges may apply. This default also gets reflected on credit score. The interest charged is often very high so in case you miss an EMI you might end up in a debt trap.

For example in Australia almost 15% of BNPL users take out another loan to pay off their BNPL EMIs. In India the situation is going to be no different.

Increase in order value: It stretches the budget of customers. According to a recent survey done on BNPL by independent research company, Benori Knowledge indicated :

40% of respondents claimed BNPL resulted in a 30% hike in their monthly expenses and ⅓ of respondents said their monthly expenses shot up by 50%.

What is RBI's stand on this:

On 20 june 2022 RBI issued a circular and disallowed non bank prepaid wallets and cards from loading credit lines into the platform. which is said to be a huge blow to growing fintech startups like uni, slice etc. But why?

You see, Fintech companies alone cannot issue PPI i.e. Prepaid Payment Instruments because they don't have PPI licence from RBI. So they tie up with a bank or NBFC and issue the card. So these fintech companies are just facilitators.

The problem started when they challenged the position of credit cards by issuing physical BNPL cards like uni and slice to make the payment experience the same as credit cards.

In RBI's recent notice it has asked these companies to stop issuing these cards. You see the segment of audience that these BNPL companies are targeting is the one with low income and low savings which makes them more vulnerable to falling in a debt trap.

What is the way forward:

RBI is in touch with the companies to formulate better rules and regulations for this robustly growing segment. RBI is not against BNPL but what concerns RBI is the cost of convenience that it comes with which is often underrated. But this market is growing at a gigantic rate so RBI will see its potential and will make rules that protect the interest of customers and also doesn't kill the BNPL market. What looks promising is RBI's recent announcement of Payment Vision 2025.

Sources:

1. https://www.outlookindia.com/business/5 reasons why gen z and millennials prefer bnpl mobikwik zestmoney amazonpaylater flipkartpaylater olamoneypostpaid to shop news 190422

2. https://www.financialexpress.com/money/millennials and genz drove demand for bnpl in 2021 report/2410535/lite/

3. https://www.smallcase.com/blog/is the rbi killing bnpl/

4. https://youtu.be/LwnApD9YXNY

India@100 An Economic Superpower

By: Saurav Garg (Kirorimal College, DU)

‘India surpassed UK to become fifth largest economy of the world’, ‘India achieved the growth rate of 13.5% in Q1FY23’, ‘India is third largest economy in the world in terms of GDP(PPP)’ following headlines have been occupying the front page of our newspapers for quite some time. Do these headlines indicate India's growth trajectory to become economic superpower or are these veil to many social, political and economic difficulties faced by people nationwide??? Let’s find out through the course of this article whether India will be able to become economic superpower in near future and if so what are the challenges that it needs to overcome??

India, as of now, is not an economic superpower however, seeing an exponential growth rate, lightning fast post pandemic recovery and the entrepreneurship wave across the country, it can be called as POTENTIAL SUPERPOWER for sure. There are several reasons which make it possible for India to make it to the cohort list of potential superpowers and the ones which prevent it from becoming actual one. Let’s analyse each one by one.

The reasons in favor of India becoming a developed nation are as follows

STRATEGIC POSITION

India's location at the head of the Indian ocean gives it a great strategic importance and helps in maintaining contact with the rest of the world. It helps India to keep a close contact with West Asia, Europe, West Africa from the western coast and Southeast and

East Asia from the eastern coast. It is also an important transit sea routes connecting the two regions that is countries of Europe with countries of East Asia. India has an important position with regard to international sea routes making it potentially powerful as the country has the longest coastline on the Indian Ocean.

Thus, India's strategic position is a great helping hand in handling international business and is a shot in the arm in becoming a developed country.

 POPULATION

Many see India's population as a hindrance to its economic growth and root cause of many relations problems but watching from a wider perspective, it will be one of the major contributor to economic growth. India is the 2nd largest populous country of the world but the plus point is that 65% of it are below the age of 35 years due to which it will have an ample amount of workforce.

While in the upcoming years major countries are going to feel the blow of declining workforce, India will be brimming with youthful energy.

 FOREIGN RELATIONS

Unlike past, India now has not only built but maintained and rather radically ameliorated the previous ones also.

Earlier India was part of alliances just for name sake but today it holds a strategic position and has a say at many international forums be it BRICS or G20 or QUAD etc.

Mexican President said that he wishes to give written proposal to UN to create commission for promotion of world truce which should include Pope Francis, UN Security General and Indian PM. This statement is evident of the fact the respect that India has gained over few years.

 ECONOMIC GROWTH

India is still a developing country but the growth rate shown by it are much more than the developed nations, in Q1FY23 while US showed growth rate of only 0.01% and China fell by 0.04% India grew at a whopping 13.5%.

Be it primary sector (9%) or secondary sector (12%) or tertiary sector (11%), the numbers are positive.

India is creating it mark in research and development, science and technology and tourism etc. a perfect recipe for an economy to become economic superpower.

Now let’s turn to part which analyses the reasons that is preventing India from becoming an economic superpower:

DEMOCRATIC REPUBLICANISM

India is one of the largest democracies in the world, but while enjoying its benefits it has to bear many costs also. We are aware of multiple ethnic groups in India so government while deciding upon any policy has to consider the interests of all the groups because it cannot favour any one group as it can cause resentment among other groups thus weakening the fundamentals of democracy. This doesn’t mean that India should lose its democratic structure, it is the best one when compared to others, but its just that India has to bear some costs in maintaining that.

ECONOMIC OBSTACLES

India has many economic obstacles from poverty which is about 20% of Indian population to literacy rates which is uneven among the states to unemployment and inflation which is continually rising to infrastructure which is far from basic in some states to health which is still in its nascent stage and many more that hinder its growth and become a hurdle in its race to become economic superpower.

Source: worldbank.org

ACCUMULATION OF WEALTH

Rich are getting richer, poor are getting poorer this saying is actually gaining sense in recent times as the increase in wealth is majorly shared by high-net-worth individuals and not by middle or low income class. Only 5 6% of the population contributed whole of the tax revenue of the country, from this the inequality of income can be deciphered.

Keeping in mind the reasons that prevent India from its potential growth following steps can be taken in this regard:

It needs to develop its manufacturing sector because it is the only sector which is employer of both skilled as well as unskilled workforce. And if there is development in industries, it will not only contribute to GDP of the county but also tighten the gap between rich and poor.

When a building collapses, we say its foundation must be weak; similarly the root cause of many problems in India lies in its foundation which is none other than education. Due to low literacy rates people are not only economically poor but also narrow minded, culturally divided and intolerant to other religion thus giving rise to communal violence. So India needs to make reforms in that particular sector.

Indian government needs to reduce burden of loss making PSUs and privatise it because that entities which are making losses for decades and wasting the resources of country

don’t deserve to be public sector entity, instead the better approach is to hand over to private sector which works efficiently and may turn it profitable.

So, seeing the whole scenario there are bright prospects for India to become economic superpower provided these hurdles or hindrances are dealt with perseverance and resilience and any decision that is made or will be made should be from an economy point of view keeping in mind the interest of economy as a whole.

And going by some facts and figures, India needs to grow by atleast 9% each year to become USD 5 trillion economy and USD 10 trillion economy by 2025 and 2030 respectively.

If we individually contribute then, GOOD DAYS WILL SURELY COME.

Is BNPL in India mimicking western Countries?

By: Moksh Dua (College of Vocational Studies)

BNPL is a recently introduced terminology used for a short term financial arrangement in which a customer can purchase product now and pay for it later in the small no cost EMIs. It is during the Covid 19 only that BNPL has gained so much traction. BNPL Payment mechanism offers several benefits like interest free payments in form of EMIs, no need of security, approval is fast etc.

BNPL is different from credit cards in the way that BNPL offers interest free payments. However, BNPL does not offer credit points if you make payments on time, thereby leads to no improvement in credit history.

BNPL has a bright future owing to several factors like increasing internet penetration, interest free instalments, easy approval etc mainly driven by young generation who wants to enjoy experiences and avoid committing to long term debt obligations. BNPL companies earn from mainly 2 source: a) Commission charge from sellers and b) Late fees charge from buyers.

BNPL helps consumers in getting the things that they need immediately while helping the sellers in increasing their sales. Even though, BNPL arrangement may seems a win win situation for both customer as well as sellers, it may not be as much good for an economy as a whole.

Due to BNPL, customers purchases those products that they don’t need even. This may lead customers to not able to pay EMIs of purchases on time. Sometimes it may result in more and more and debt to pay off the previous ones. This is known as vicious trap of BNPL. Non repayment of BNPL instalments also lead to bad credit score which further reduces the chance of loans in future.

There is one flaw with BNPL companies that they are giving BNPL services to buyers without checking their credit history which results in non repayment of EMIs on time or non repayment at all. This is creating debt burdened society.

Buy Now Pay Later in UK

BNPL is the fastest growing online payment method in UK having growth rate almost double that of bank transfers while more than triple that of digital payments. According to the survey by Researchandmarkets.com, BNPL Gross Merchandise Value in UK is expected to grow from US$ 5827.2 million in 2020 to reach US$ 18773.4 million by 2028. Currently 4 in 10 i.e. almost 37% of brits have used BNPL service at least once with most demands coming from millennials. Online purchases using BNPL in UK is growing at a rate of 39%. Klarna is the most downloaded app in UK for BNPL services with 9,86,000 downloads from January 2020 till July 2020. MyAgros with 4,35,000 downloads during the same time period comes at second place (data as per reports by Researchandmarkets.com). The most demand for BNPL services comes from London followed by East midlands and the South east.

In U.K. increase use of BNPL owed to easy approval and spread of credit over monthly instalments of BNPL debts due to which buyers purchase the product availing BNPL facilities, besides not able to afford the product. One- fourth of adults in UK were not able to pay instalments on time at least once. Also, one- third of BNPL users between 18 to 34 missed payments once at least as per the survey . UK shoppers racked up more than £ 4 billion till November 2021 in FY 22 making the economy more debt burdened.

As per research reports by Researchandmarkets.com, USA BNPL GMV is expected to grow at 16% from US$ 88939.5 million in 2020 to US$ 309771.4 million by 2028. The popularity of BNPL as payment method surged significantly in past few months only. Though Paypal Credit is mostly used application for digital credit, Klarna tops among BNPL payments followed by Affirm and Afterpay in terms of users, as per reports by statista in 2020. More than 55.8% of US consumers had used BNPL platform atleast once in their lifetime. Major demand comes from Men as compared to women. As per statista, older generation in USA are using BNPL services more as compared to young generation.

In USA, main reasons for using BNPL services were to make purchases that otherwise would not fit in the budget, to avoid paying credit card interest among others. As per survey by lendintree.com, more than 4 in 10 (i.e. 42%) americans were not able to repay atleast one instalment on time as per the survey. With increase in users of BNPL and increase defaulting on payment, US economy is also getting into debt burden without explicitly knowing it.

Buy Now Pay Later in India

India is also becoming one of the growing user of BNPL payments. Gross Merchandise Value (GMV) with BNPL as payment mechanism in India totalled to USD 6990.5 million in 2020 to USD 52827 million by 2028 with 26.6% CAGR as per research reports by ResearchAndMarkets.com. Lazy Pay, Simpl, Postpe are some of the key players in India who are providing BNPL services. India’s total spending by BNPL makes 3% of ecommerce companies transactions in 2021 which is expected to grow to 14% of ecommerce companies transactions by 2026 as per market research by Benori Knowledge. In India, BNPL growth is mainly owed to Convenience and easy availability with most demand coming from men as compared to women similar to USA as per finder.com

Conclusion

The trend in India is similar to that of western countries such as USA or UK with default rate almost similar. Digital Credit and BNPL is here to stay in future considering the advantages. This can be supported by increasing BNPL users worldwide. However, along with this, default rate on payment is also increasing. On an average 1/3rd of users worldwide have defaulted on at least one instalment in 2021. The primary reason for increasing rate is giving credit to those who can’t afford it. It is high time that India requires regulations on BNPL and digital credit, to allow systematic growth of BNPL in India. Taking examples from UK, India can restrict BNPL credit to only those who could afford the credit rather than extending credit to anyone. Also, BNPL advertisements should not be misleading to viewers and thus companies should disclose all information like late fees charges or debt being transfer to the debt collection agency in case of non repayment. No doubt BNPL is beneficial for users, however, with regulations, BNPL will become more reliable and trustworthy.

India @ 75: The Road Ahead in Light Of Global Macroeconomic Headwinds

By: Anindyo Kamal Sen (Jadavpur University)

In 1897, Paul Gauguin painted what would later go on to become his magnum opus, whose moniker is borrowed as the title: “Where Do We Come From? What Are We? Where Are We Going?”. In a letter to his friend sent from Tahiti to Paris, he describes the esoteric imagery of the painting in extensive detail wherein he also invites the gallery to “read” the image.[1]

In the spirit of Gauguin, we shall try to answer these questions for India while “reading” more into the backdrop of the global macroeconomy.

Where Do We Come From?

From the 6th position to the 5th position in 75 years.

In 1950, right after Independence, India’s world ranking by nominal GDP was #6. Recently in September 2022, India beat UK to become the world’s fifth largest economy. What may be startling to many is that India has come a full circle from 1950 to 2022. The table below illustrates this well:

Sources: Madison Project Database (2020), World Bank, tabulated by author.

In 1950, India was ranked 6th in the world by nominal GDP and then we slipped throughout the 60s and 70s all the way to rank 13th in 1980. In hindsight, this was a bad patch for India in our development journey. Notably, this same period of 1960 1980 was also the time when many of our peers, including the so called “Four Asian tigers”: Singapore, Hong Kong, Taiwan and South Korea grew rapidly and at present are high income countries in Asia.[2]

Going back to the table it is also apparent that in the last 20 years our growth started picking up the pace again and now we’re back at 5th position. This is a V shaped development path.

There’s that V shape again.

There are two ways to look at this. One is that in the 75 years the economic gains that India has made has really been a bit of a wash so to speak. The second way to look at it is that India is undoubtedly on the upswing. It is also a bit unfair to only consider money income as a sign of our progress.

There are many other indicators that provide an equally descriptive picture of India and show actual progress that we have made as a nation. In many indicators like life expectancy at birth, mortality rates, child mortality, average years of schooling etc we have taken fabulous leaps. In these key indicators of societal progress, we are doing well and the forecast for the future is even more encouraging.

The per capita comparison depicted below is even more telling:

Source: World Bank. India's life expectancy at birth through the years.

What Are We?

A country of disparity.

India is considered to be one of the biggest markets in the world with a booming middle class that emerged in the 21st century. However, according to a Pew Research study looking into the breakup of income levels across the world released in 2015, while the poverty rate in India fell from 35% in 2001 to 20% in 2011, the share of the Indian population that could be considered middle income increased from 1% to just 3%. At present, only around 2% of India’s population is middle class.

Source: Pew Research Centre

This mistaken notion that the Indian middle class is exceptionally big and only getting bigger, is something that even MNCs fall for. The companies that don’t realise this before finalising their plans to jump into the Indian market only face disappointment. An interesting case study is that in India, Starbucks added 51 shops in the last 12 months while in China, that actually has a big middle class of about 30% according to the same Pew Research study, they opened a new shop every 15 hours.[4]

Companies in the consumer durables space also concentrate their advertising and commercial endeavours only in the metro cities in India. This hyper industrialisation only concentrated in the cities can also be seen from the Indian govt’s own data. In 2015, the Indian government undertook the 4th round of the National Family Health Survey (NHFS) where they asked respondents whether they had a TV, AC, washing machine or fridge at their home. The findings illustrated the disparity of demand for goods and services for many MNCs. Only 7 cities account for 33% of all washing machines in India. Even more startling is the result that about 15% of all ACs in India are only in Delhi!

Much more work needs to be done, primarily to ensure that the poorest of the poor in villages are able to access resources that are earmarked for them by the government and more initiatives need to be taken in order to uplift them from severe poverty. In the long run, only education will facilitate the same.

Where Are We Going?

To a world where 5% GDP growth will be considered high. It may not be wise for us to keep anchoring ourselves to what we achieved when the global economy was booming. The only reason being the global economy is not booming at all right now.

To make peace with this uncomfortable proposition, we only need to understand only one statistic: In 1950, 35 countries (25% of all countries at that time) had a 7% or more annual GDP growth rate. Now, there are less than 10 countries (about 5% of all countries) that have a 7% or more growth rate. This number peaked in 2007 when about 40 odd countries were growing at 7% or more a year.

The factors that are responsible behind this unsavoury development are: a massive global demographic shift with a never before seen population growth slowdown/decline: across the world, birth rates are decreasing and life expectancy is increasing. These two factors together result in an ageing population that is retiring from the workforce and depending on their children for sustenance. This phenomenon can be seen starkly in Japan, where adult diapers sell more than baby diapers, but is present in almost every developed country to some extent. The retired population, economically speaking, is a burden on the workforce who find their economic freedom limited and hence consume less, take less risk, and think twice before starting a new business; all of which is not good for economic growth.

unfathomably high amount of debt that’s mounting on all countries, developed or not: taking on debt is nothing but buying from future growth. Even before the pandemic and the Russia Ukraine war, global debt was at unsustainable levels.

and,

de-globalisation, that is, a return to protectionism globally: BREXIT, China US Trade War and even countries like India that have started focusing on indigenous industries and taxing imports heavily. Lesser trade implies lesser gains from trade that slows down economic progress. One of the most counterintuitive ideas in tax economics is the theoretical result that an import tax is an export tax. They both have the same effect of reducing international trade in general.[5]

The aforementioned factors are setting up the stage, or have already done so, for lowering growth everywhere. We now need to have new benchmarks for what we define as economic success. A 7% or more growth has almost become extinct in this world; hence we need to update our benchmarks of what constitutes “high growth”. It is quite possible that for the coming decades India will go into an autopilot mode of 5% Y o Y GDP growth unless the government plays an active role in pushing for equitable and structural economic reforms.[5]

References:

[1]: Dr. Noelle Paulson, "Paul Gauguin, Where do we come from? What are we? Where are we going?," in Smarthistory, August 9, 2015, https://smarthistory.org/gauguin where do we come from what are we where are we going/.

[2]: https://nhglobalpartners.com/four asian tigers economy/

[3]: A Global Middle Class Is More Promise than Reality: https://www.pewresearch.org/global/2015/07/08/a global middle class is more promise than reality/

[4]: https://www.cnbc.com/2017/12/05/starbucks is opening a store in china every 15 hours.html

[5]: https://www.aei.org/carpe diem/exports and imports are flip sides of same coin therefore a tax on u s imports is a tax on exports/

Are recession and stagflation forthcoming in India?

By Mayank Sharma CCS NIAM, Jaipur

Recently, IMF (International Monetary Fund) released the World economic outlook update, in July 2022. Considering this India’s growth had been slashed from 8.2% to 7.4% for the financial year 2022 23. This revisionist rate is quite similar to RBI’s (Reserve bank of India) projected rate for GDP growth of 7.2% for FY 2022 23.

IMF had also alarmed the possibility of a recession in India for the year 2023. The main reason for this pessimism is the aggressive hike in interest rates both by the U.S. fed and the RBI, such tightening of monetary policy is predicted to hurt growth and as a cascading effect likely to dampen demand.

But for India, things appear to be brimming with optimism, currently, the Indian economy is the bright spot on the world stage, insulated from external economic headwinds. To prove this let us look at seven major indicators to understand the positive trends in the Indian economy.

2022 23. India has registered an

previous

15.0% 20.0%

5.0%

-30.0% -25.0% -20.0% -15.0% -10.0% -5.0%

First Quarter GDP Figures For Three Consecutive Financial Years

2020-21

growth -23.8%

2021-22

2022-23

13.5%

Under this, Private Final Consumption Expenditure (PFCE) share in GDP increased by 59.9% despite inflation, Similarly, Gross Fixed Capital Formation (GFCF) which accounts for private investment saw a growth of 21%, with a rise in GDP share by 34.7%. These figures along with several other indicators suggest a strong resumption of consumption or demand in the Indian economy, which is quite important as it constitutes 60% of India’s GDP.

Transactions

Credit Card Spendings On e-commerce Platforms For

2022 23 (In Rs. Crore)

This upward trend in consumption is backed by recently released figures on UPI transactions and credit card spending on e commerce platforms by RBI.

Adding to this, the month of September 2022 marks the reversal of the foreign portfolio investment outflow trend which for the past nine months, had been showing a massive outflow of foreign investment from the equity market. The main reason for investment inflow is credited to positive macro indicators of the Indian economy.

Moreover, the festive season is around the corner, looking at the consumption trends FADA (Federation of Automobile Dealers Associations) predicts massive sales in a passenger vehicle that might touch their highest levels in a decade this year. Likewise, as housing demand too expected to rise, companies are producing lucrative offers and discounts to tap into the demand. This optimism in the industry is reflected in the quarter to quarter business confidence survey conducted by NCAER (National council of applied economic research).

NCAER-NSE (q-o-q) Basis Survey

124.4 142.9 138.5

2021-22:Q1

2021-22:Q3 2021-22:Q4 2022-23:Q1

Source: www.ncaer.org

Another indicator to check the optimism and favorable consumer sentiments prevailing in the Indian economy comes from RBI’s consumer confidence bimonthly survey.

Consumer Confidence Indices

Current Situation Index

113.3

77.3

May-22 Jun-22 Jul-22

Expectations Index

Source: RBI’s consumer confidence survey

look more upbeat once we view the

Trends in GST Collection (Rs. In Crore)

collection

Direct tax collection data. For six months in a row GST collection has been more than Rs.1.4 lakh crores. Likewise, the direct tax collection result released by Press Information Bureau, Government of India on 9th September shows Direct tax collection, net of refund to be 30.17 % higher than the net collections from the previous year. Net direct tax collection is expected to reach 14.20 lakh crore for FY 2022 23.

Net Direct Tax Collection (Rs. In Lakh Crore)

going through all the data and figures it is quite evident that India is far away from recession, but when it comes to stagflation things appear to be a mixed bag. First, we need to understand what we mean by stagflation. In layman’s terms, Stagflation indicates an economic condition of Low growth, High inflation & High unemployment.

Although we are seeing an upward trend in growth projections, it is not by any means satisfactory by Indian standards, anything below double digit growth is a setback as the number of jobs created in the economy is simply not enough to absorb the bulk of our young workforce entering the job market. The latest CMIE Unemployment rate data seems to suggest an upward movement in the unemployment rate from 6.83% in July 2022 to 8.28% in August 2022, this upward trend is noticeable both in Rural and Urban areas.

Unemployment Rate (%)

6.97

7.83 7.14 7.83 6.83 8.28

Oct-21 Nov-21

Feb-22 Mar-22 Apr-22 May-22 Jun-22 Jul-22 Aug-22

: unemploymentinindia.cmie.com

Unemployment Rate (Rural and Urban)

7.37 8.2 9.3 8.14 7.57 8.28 9.22 8.24 7.32 8.22 9.57

7.91 6.41 7.28 5.83

8.37 7.24 7.18 6.63 8.07 6.17 7.68

Jul-22 Aug-22

Urban Rural

Source: unemploymentinindia.cmie.com

This data just tells a part of the story which is open unemployment. What this data does not tell us is the issue of underemployment and disguised unemployment. It is vitally important for the government to enable an environment of quality job creation before our demographic dividend turns into a demographic disaster.

Another challenge in front of the Indian economy is high retail inflation, For the eighth consecutive time, retail inflation was out of the RBI tolerance limit of 2 6%. Retail inflation in August 2022 rise to 7.00% from 6.71% in July 2022. The main reason behind the hike in inflation seems to be high inflation in food products, especially cereals.

RETAIL INFATION FOR THE YEAR 2022

7.01% 6.71% 7%

6.01% 6.07%

Source: pib.gov.in

In the same IMF report, the global growth projections were slashed from 3.6% to 3.2% in 2022, the major reason being the tighter monetary control globally, World’s largest economy the U.S.A has technically entered into a recession as it has contracted consecutively for two quarters, while the Chinese economy registered a meager growth of 0.4% in Q1 of FY 2022 23. European economies too are on the brink of recession. These trends suggest a global reduction in demand for Indian export which will widen the trade deficit further.

Trade Deficit (in US $ Billion)

Recently, the US fed hiked the Interest rate by 75 basis points, which might affect foreign investment ultimately leading to equity outflow, an increase in the Interest rate will strengthen the dollar index, thus depreciating the rupee further.

Overall looking at the state of the Indian economy, it is highly unlikely for the country’s economy to face any kind of recession due to high domestic consumption, however, to overcome stagflation Indian economy requires a job inclusive faster pace of growth. At the same time, it is important to tame inflation and for that, a delicate balance between growth and inflation has to be maintained.

REFERENCES:

2. https://www.imf.org/en/Publications/WEO/Issues/2022/07/26/world economic outlook update july 2022

3. https://pib.gov.in/PressReleasePage.aspx?PRID=1855789

4. https://www.livemint.com/news/india/rising-credit-card-upi-payments-indicate-increasein consumption report 11662915648367.html

5. https://www.business standard.com/article/markets/fpis infuse rs 5 600 crore in indian equities in september so far 122091100490_1.html

6. https://www.ncaer.org/Reports/NCAER_NSE_BES_Report_July_2022.pdf

7. https://rbidocs.rbi.org.in/rdocs/Publications/PDFs/CCSJULY2022B286852B78414D739 9C6B50AF99D38FE.PDF

8. https://gstcouncil.gov.in/sites/default/files/press release/PressReleasePage_August2022.pdf

9. https://economictimes.indiatimes.com/news/economy/finance/net direct tax collection reaches highest ever figure in fy 22/articleshow/91108170.cms

10. https://theprint.in/economy/direct tax collection surges by 35 to rs 6 48 lakh cr/1122779/

11. https://pib.gov.in/PressReleasePage.aspx?PRID=1858129

12. https://unemploymentinindia.cmie.com/

13. https://economictimes.indiatimes.com/markets/stocks/news/us enters technical recession but-why-is-dalal-street-rallying/articleshow/93202204.cms

14. https://timesofindia.indiatimes.com/business/international business/chinas gdp growth slows to 0 4 over covid curbs/articleshow/92911538.cms

15. https://www.bloomberg.com/news/articles/2022 08 15/economists say a euro zone recession is now more likely than not?leadSource=uverify%20wall

16. https://www.livemint.com/economy/trade deficit at record 31 bn exports slide after 19 months 11659465101104.html

17. https://pib.gov.in/PressReleasePage.aspx?PRID=1858724

18. https://www.ndtv.com/business/another big fed rate hike of 75 basis points to rein in inflation 3366478

The Distribution of “Freebies”: An Assessment of Historical Evidence and Analysis of Socio-economic Impact on India Economy

By: Rahul Sinha (IIFT, Kolkata)

Abstract:

The distribution of freebies for gaining political support has become a common practice during electoral campaigns. Time and again, various oppositions have raised the question of its ethicality and pointed out the impact it created on voters and most importantly on the economy of our nation. The article attempts to assimilate the historical evidences behind this political stunt and assess the economic influence of this phenomenon.

Definition and non-political origin:

According to the apex body for judicial law in India (Supreme Court), there exists no accurate definition of freebies. According to the thesaurus, Freebies are commodities which are circulated among public or a certain group of target audience without charging a price. There does not exist enough literature to track back the origination of the term and find its historical usage.

However, this marketing phenomenon was popularised by Benjamin T Babbitt during the early 19th century. Babbitt was an entrepreneur who made a prolific influence in the soap and detergent industry. The first recorded indication of distribution of free samples were during 1860’s when Babbitt offered free soap bars and used several radical publicity tactics to promote his endeavour.

It was quite a revolutionary idea and was way ahead of its time.

Between 1894 and 1913, “Coca Cola” profoundly relied on free samples to get the word out about their new product, they frequently mailed out coupons to chemists and random customers. In a report, the company projected that around 1 out of 9 Americans were given a free drink during the initial 20 year period of their establishment. During its initial days in 1983, Nestlé distributed free samples of the newly found two minute instant noodles “Maggi” in elementary sections of urban government sponsored schools.

This stunt of distributing freebies was a successful marketing strategy for quite some time. However, it was in the year 1954 when it became an integral component of Indian electoral politics. It is often claimed to be the flag bearer of populism politics where distribution of materialistic commodities determines the popularity and act as an electoral parameter which further affects the decision making for citizens.

The brief history of freebies in India:

If we offer a glance to the electoral antiquity of India, we will know that the origins of freebie culture began in the geographical south of India, Tamil Nadu. The chief Minister of the erstwhile

Madras State promised free education and meals for students between 1954 and 1963. However, it is a matter of examination to determine whether education, healthcare and other necessary rights qualify as freebies or not.

In 1967 DMK founder, CN Annadurai took this strategic move forward, by promising 4.5 kgs of rice for a mere one rupee if he were to be elected. After political strategists understood the impact of these moves, it is escalated into a common practice for political parties to announce such free commodity distribution schemes in their memorandums. In 2006, DMK supremo M Karunanidhi launched the free colour TV screen, this was the first time when a non essential commodity which qualified to be a luxurious good at that time was to be distributed for free. In Bihar (2006), Nitish Kumar also announced a distribution of free cycles for girls who belonged to non general castes. Later, this event of distributing cycles witnessed massive upscaling. In 2008, Naveen Patnaik (Odisha) distributed cycles for girls irrespective of their caste. In West Bengal, this was replicated by CPI(M) and TMC during their election campaigns as well. At times, these events took hilarious turns as well. In 2011, AIADMK supremo late Jayalalithaa promised 4gms of gold, free of cost, for girls who were getting married. Finally, in 2013 Aam Aadmi Party promised the free distribution of several essential commodities during their electoral campaigns. Arvind Kejriwal promised 20,000 Litres of free water for residential societies ever month, free education for all children in Gujarat and Pind clinics in Punjab which could have been used for accessing free healthcare services.

How do freebies differ from subsidies?

We must comprehend that there exists a line of variance between freebies and subsidies. We can categorize free goods into essential and non essential sub groups.

Free or Subsidized Goods

The essential free public goods are non excludable and non rivalrous in nature. Essential commodities and services like education, health care and infrastructure are public goods which must be provided by the government at zero cost. This is a part of the government’s ethical, moral and socio-economic responsibility. The provision of these goods must not be classified as distribution of freebies.

Whereas distribution of non essential (unnecessary for maintaining a basic standard of living commodities like televisions, cycles, laptops and other such goods which are rivalrous and excludable can be classified as distribution of freebies.

Subsidies are a form of government expenditure which empowers the target citizens to afford certain essential commodities at regulated prices. Subsidised goods are often distributed through public distribution systems and these are very different from freebies. Goods which are necessary to maintain a basic non luxurious standard of living ex. rice, flour, pulses are often available at subsidised rated for target citizens in socialistic and mixed economies.

Accounting the distribution of freebies:

We citizens, pay taxes to the government which is a key component of its revenue, this revenue must be used in form of public expenditure or similar kind of development activities within the nation, for the benefit of the citizens. Subsidies are often sponsored by the revenue which the government earns in form of taxes. Ethically, expenses on freebies should not be paid from the government (state) revenue treasury. In our case, if a political party in India wins an election and fulfils its promise to distribute certain freebies it often draws the necessary amount from the state revenue treasury. When it comes to expenditure, certain states like West Bengal, Rajasthan, Punjab and Kerala spend around 90% of the revenue which they earned. This expenditure contains a major chunk of cost in form of freebies.

The impact of this revenue expenditure on various economic activities last for about a year, these kind of disproportionate revenue expenditures can lead to fiscal deficit and push India into severe economic distress. A similar kind of economic distress was witnessed by Sri Lanka due to huge fiscal account deficits.

According to a report published on Times of India, expenditure on freebies range from 0.1 2.7 percent of Gross State Domestic Product. Among other highly indebted states Punjab, Rajasthan, Bihar and Kerala have a very high state debt to GDP ratio.

Conclusion:

According to the “Section 123” in the “Representation of The People Act” {1951}, bribery to voters and creation of induced impact in electoral decision for individuals are recognised as judicial offence. Time and again, SC has said that freebies are not a form of bribery on behalf of the government. This is a sub judice matter and requires further assessment.

It is the socio-economic responsibility of the central and the state governments to provide subsidies for necessary commodities and even freebies in form of merit goods for the public. A freebie distributed by a political party during or after its electoral campaign can be considered as ethical until and unless it severely affects the decision making of the citizens. The expenses on freebies from the state revenue treasury must be restricted to maintain order and economic sincerity across the nation. As recommended by the apex judicial body (Supreme Court), the establishment of a governing council for looking after the ethical distribution of freebies and the assessment of its economic impact is highly essential for the Indian economy. The main objective of the body must be to restrict fiscal deficits and maintain a healthy debt to state GDP ratio.

Figure 2: Times of India State Debt Graph.

References:

1. https://economictimes.indiatimes.com/news/india/the freebies debate genesis definition and-impact-on-welfare-economy/articleshow/93824884.cms?from=mdr

2. https://timesofindia.indiatimes.com/business/india business/explained what are freebies and how they may burden state finances/articleshow/93306455.cms

3. https://www.businesstoday.in/latest/economy/story/what do freebies mean to whom 344311 2022 08 10

4. https://www.bbc.com/news/world asia india 62722592

5. https://economictimes.indiatimes.com/opinion/et commentary/dont let freebies be a crutch/articleshow/93667455.cms?from=mdr

Tax incidence

By: K Nupur Temani (KCLAS)

Tax incidence or incidence of tax stands for the bifurcation of tax burden that takes place between the producers and the consumers. Tax incidence describes a case when buyers and sellers divide tax burden between them. To illustrate this let us consider five different fields in which consumers spend most of their income and understand how the tax incidence happens in those respective fields. But before moving on, one thing we should keep in mind is that in India GST has replaced all host of taxes, replacing value added tax (VAT), excise duty for all products.

SURVEY OF DIFFERENT PRODUCTS AS FOLLOWS:

1. PETROL:

Interviewed: Selvam Kumar (Owner of petrol bunk, Erode)

While talking to Selvam Kumar over phone, we get to know that petroleum products come with 18% tax. Taxes are immediately reflected in retail prices, sometimes it is also noticed that retail prices rise more than the tax increase. The reason behind this is that Petrol comes under the category inelastic goods so its demand is unaffected by prices. When governments impose a petrol tax, producers increase the sale price by the full amount of the tax, transferring the tax burden to consumers. Hence producers are free from tax obligation when it comes to inelastic goods

One question which arises is that: why does the price of petrol differ from state to state? The reason stated that there is no uniformity of taxes in all states in India. State government adds different layers of taxes depending upon how they have sourced petrol.

2. MEDICINES:

Interviewed: Sanjay Kumar (Owner of Deepa Medicals, Erode)

In the field of medicines, tax is being imposed in four different categories 5%, 12%, 18% and Nil Tax (“Tax Free “for blood and its derivatives). The demand for medicines is relatively inelastic. Despite changes in cost due to addition of new tax, its market will remain relatively constant. Here, tax obligation is covered by consumer.

3. JEWELLERY:

Interviewed: Bapna Jewellers

Jewellery is an elastic good. Tax levied on such products shifts most of the burden of tax incidence on producers as an increase in price of jewellery has a significant impact on demand for such associated goods, (elastic goods are those goods with close substitutes or those which are non essential to human life). In jewellery items it is the producers bearing the cost of the tax.

4. FOOD AT RESTAURANT:

Interviewed: Owner of SMD, Erode

The demand for food at restaurant is inelastic compared to homemade food. Consumers are relatively insensitive to the price change. In such cases restaurants are able to increase their price of the food inclusive of taxes while the demand for their food will relatively stay the same.

5. TEXTILE PRODUCTS:

Interviewed: Nitin Mangal (owner of Shree Shyam Textiles, Erode)

He gives an example: Suppose he as a trader purchases 10 bed sheets worth 2500 (250*10) + 5% IGST + carriage expenses from Panipat, Haryana. He will sell his goods keeping 20% profit margin. To get the selling price he will add the cost of one bed sheet + 20% profit + transport charges (50) +5%GST. Selling price of one bed sheet = 368.

As Mr. Nitin owns a retail shop he sells his products and service inclusive of taxes and other expenses. So whatever additional charges inclusive of tax are incurred by the producer is directly passed on to the consumer. From this we can conclude that tax incidence which occurs in this example is eventually borne by the consumer.

To conclude:

As far as Tax Incidence is concerned, in case of indirect taxes it is always the consumer who bears the brunt of cascading of taxes as he is the last one in the supply chain. With the advent of GST, there has been seamless flow of tax credits paid at earlier stage. And thus, the people in the supply chain by one way or the other eventually shift their burden to the next one in the supply chain and ultimately the consumer.

And this is applicable in almost all the cases since GST has subsumed almost all the taxes and covers all the goods and services (except a few). As the object of GST says 'One Nation, One Tax', it is also expected that in the future Direct Tax like Income Tax will be repealed and Direct Tax code would come and there will no double taxation especially for business houses one under Direct Tax and another under GST.

The much-awaited entry of Indian Bonds in JP Morgan's EM Index

By: Lakshay Ohri & Aman Raikhere (Great Lakes Institute of Management, Gurugram)

The escalation of tensions between Ukraine and Russia has resulted in the division of two blocks: a block of US backed NATO countries, with Russia fighting alone, and India, which has stuck to its non alignment ideology, which they used from WWII to the Cold War and still adhere to because it is the best alternative, as it supports the national interest, resulting in getting crude oil at a discounted rate. India saved ₹20,000 crore which is equivalent to the S 400 deal thus making it next to free to the Indian government and to top it all India's push for its permanent seat in the UN Security Council has remained fruitful as it is the only country which has gained the acceptance of both the US and Russia.

With the recent exclusion of Russia from the JP Morgan Government Bonds Index of Emerging Markets has opened the gates for the Indian bonds to be added to the list. The JPMorgan emerging economies index only includes nations that are penetrable by the majority of global investors.

Initially it is expected the weightage of the Indian bonds to be at a lower percentage it has resulted in the increased demand for Indian bonds. Currently, the majority of these bonds are acquired by banks, insurance companies, pension funds, EPFOs, and mutual funds. These are nearing the end of their utility. While the government's borrowing requirements will continue to

be high in the future. Including Indian government bonds in global bond indexes will add another seat to the table, relieving pressure on the remaining investors. Currently, the JP Morgan Government Bonds Index of Emerging Markets include the likes of China, Indonesia, Thailand, Malaysia, Brazil, Mexico and South Africa thus a country like India with its diverse structure the economy, India would provide much-needed diversity to the GBI-EM index and would be a solid addition to the index in the long run.

Image source : https://economictimes.indiatimes.com/prime/money and markets/inclusion in jpmorgans global index could be a big positive for indian bonds but for how long/primearticleshow/94185241.cms

The recent rate hike by the US Federal Bank, added pressure on the rupee, resulting in the rupee crossing the 80 mark, thus the inclusion of the rupee in the index will be a welcome step in the right direction as far as the value of the rupee is concerned, and as it is expected that the inclusion will induce an inflow of $30 billion in the bond market, which will be in trenches and the in-flow is estimated in the economy by 2023-24, leading to an appreciation of the rupee in terms of the dollar.

Problems with India

So, the most common sensical question would be why India has not already been added to the index even though the finance ministry and RBI met with index managers with the two of the biggest global benchmark indices in the past few years which are namely the Bloomberg Barclays Global Aggregate Index and the JP Morgan GBI EM Index, to discuss India's entry. As early as 2013, the Indian government considered listing its assets for inclusion in global bond indices. However, because of restrictions on foreign investment in Indian debt, India had to take numerous procedures before its securities could be eligible. The Reserve Bank of India issued a slew of government assets exempt from limitations under a "totally accessible route" for international investors in April 2020. This was viewed as a medium way that helps balance India's worries about "hot money" outflows while completely opening up a portion of its assets to international investors, but index providers have been concerned for a few reasons which are as follows

1. One of the foremost important points is the capital gains tax on foreign investors which currently stands at 30% on the short term capital gains whereas the domestic investor has to pay a tax of 4% on the short-term capital gain thus this parity has been the bone of contention between the foreign investors and the RBI.

2. Another issue is clearing houses, where global investors want India's bonds listed on the well known Euroclear platform, which is present in 49 countries this is because JP Morgan requires trades to be settled in Euroclear to be included in its developing market bond indexes, the fact that Indian authorities are refusing to repeal the capital gains tax might mean that inclusion is hampered.

3. One of the primary criteria for inclusion in JP Morgan's index is the valuation of India's debt market. Despite the Reserve Bank's recent efforts to broaden investor bases through

the Retail Direct Scheme, JP Morgan is concerned about major institutional investors such as debt mutual funds, insurance firms, and banks in India's G Sec market.

To offset the challenges of bond settlement for India, the lack of resolution on a global platform was unlikely to derail the process, since it had not prevented the accession of either China or Indonesia. Although the time required to create a trading account in India would be "burdensome" for prospective international investors, a longer lead time for inclusion in the benchmark index might help alleviate this.

Bond markets have always had expectations, but what appears to have changed is the political support, with the PM's office last year opening up a substantial portion of its sovereign bond market to international investors, its greatest move yet to obtain entry to global indexes. A rupee offer would be the most ambitious proposal. Emerging market currencies may suffer until the dollar reaches its high, which is not predicted until 2022, because the Fed is committed to keeping inflation at 2% regardless of what occurs. By the year end, the Fed funds rate is expected to be 4%, rising to 4.5% by the March of next year. Thus, the inclusion of Indian Bonds could bring the much anticipated respite to FDI in India, and the currency may also see a reprieve in its devaluation.

References

1. Agarwal, N. (n.d.). Rising dollar and bond yields making it tougher for FIIs to stay put on D Street. The Economic Times. [online] Available at: https://economictimes.indiatimes.com/markets/stocks/news/rising dollar and bond yields making it tougher for fiis to stay put on d street/articleshow/94431771.cms [Accessed 27 Sep. 2022]

2. Buch, H. and Verma, S. (n.d.). Inclusion in JPMorgan’s global index could be a big positive for Indian bonds. But for how long? The Economic Times. [online] Available at: https://economictimes.indiatimes.com/prime/money and markets/inclusion in jpmorgans global index could be a big positive for indian bonds but for how long/primearticleshow/94185241.cms [Accessed 28 Sep. 2022]

3. Das, S. (n.d.). G Secs’ likely entry into global indices helps rupee beat EM peers. The Economic Times. [online] Available at: https://economictimes.indiatimes.com/markets/forex/g secs likely entry into global indices helps rupee beat em peers/articleshow/94061783.cms [Accessed 27 Sep. 2022]

4. Foreign investors snap up Indian bonds set for inclusion in global indices. (n.d.). The Economic Times. [online] Available at: https://economictimes.indiatimes.com/markets/bonds/foreign investors snap up indian bonds-set-for-inclusion-in-global-indices/articleshow/94175513.cms [Accessed 28 Sep. 2022]

5. Financialexpress. (n.d.). Indian bonds’ inclusion in JP Morgan’s EM index to be game changer for Rupee; US Fed meeting major trigger. [online] Available at: https://www.financialexpress.com/market/cafeinvest/indian bonds inclusion in jp morgans em index to be game changer for rupee us fed meeting major trigger/2677483/ [Accessed 28 Sep. 2022]

6. India tipped to join pivotal JPMorgan bond index. (2022). Financial Times. [online] 26 Aug. Available at: https://www.ft.com/content/f01f0d11 0a8f 4a5a 98bf d6f42b24cd1a [Accessed 28 Sep. 2022]

7. India’s bond index inclusion buzz luring foreign funds. (n.d.). The Economic Times. [online] Available at: https://economictimes.indiatimes.com/markets/bonds/indias bond index inclusion buzz luring foreign funds/articleshow/86358468.cms?from=mdr [Accessed 28 Sep. 2022]

8. Moneycontrol. (n.d.). What Is Stagflation And Is India Really At Risk Right Now? | Explained | Why Stagflation Matters. [online] Available at: https://www.moneycontrol.com/news/videos/business/economy/what is stagflation and is india really at risk right now explained why stagflation matters 9197861.html [Accessed 27 Sep. 2022]

9. Mahesh, P. (n.d.). Lower liquidity brings Ultra short term debt MFs into focus. The Economic Times. [online] Available at: https://economictimes.indiatimes.com/markets/bonds/lower liquidity brings ultra short term debt mfs into focus/articleshow/94385738.cms [Accessed 27 Sep. 2022]

10. Reuters (2022). What could India’s inclusion into major global bond indices mean? Business Standard India. [online] 16 Sep. Available at: https://www.business standard.com/article/markets/what could india s inclusion into major global bond indices mean-122091600534_1.html [Accessed 27 Sep. 2022]

11. Russia’s exclusion may pave way for India into global bond index. (n.d.). The Economic Times. [online] Available at: https://economictimes.indiatimes.com/markets/bonds/russias exclusion may pave way for india into global bond index/articleshow/94094508.cms [Accessed 28 Sep. 2022]

12. Sep 9, B. /, 2022 and Ist, 12:31 (n.d.). Russia’s exclusion may pave way for India into global bond index Times of India. [online] The Times of India. Available at: https://timesofindia.indiatimes.com/business/india business/russias exclusion may pave way for india into global bondindex/articleshow/94090970.cms [Accessed 28 Sep. 2022]

Green Bond Market in India

By: Anika Jain

Industrial development in the last century has a few unfortunate results, and ecological concern is one of them. The experts and scientists are attempting to concentrate on the component of subsidizing for climate well disposed ventures and what it means for its partners. To the best of our comprehension, no writing audit is led to break down the variables related with the development and the effect of green bonds on guarantors' crucial execution measures to meet Ecological, Social, and Administration (ESG) targets.

Green bonds are one of the monetary instruments to back such undertakings, and they give money to support green tasks. We contend that the positive administrative climate and improvement in divulgence quality are fundamental variables for the development of green securities. In addition, the survey likewise featured the effect on the essential attributes of the backer of green bonds and assuming it gives a few benefits over other monetary protections.

WHAT ARE GREEN BONDS?

A green bond is a sort of fixed pay instrument that is explicitly reserved to fund raise for environment and ecological tasks. These bonds are routinely asset associated and maintained by the mindful substance's bookkeeping report, so they conventionally convey a comparative FICO rating as their sponsor's other commitment responsibilities.

Green securities work like ordinary securities with one key contrast: the cash raised from financial backers is utilized solely to fund projects that have a positive natural effect, like environmentally friendly power and green structures such as renewable energy and green buildings.

The first green bonds were issued in 2007. For nearly a decade, the market grew slowly, but then it took off. Global green initiatives like the Paris Climate Agreement and the United Nations Sustainable Development Goals have aided in this expansion.

Green bonds are also driving growth, with major investors ranging from asset managers to insurers and pension funds eager to purchase them. Just look at the EU deal: orders outnumbered

available securities by more than 11 times. Because of the high demand, green bonds may be less expensive to issue than conventional bonds.

Financial Characteristics of Green Bonds

A green bond, like any other bond, is a fixed income financial instrument used to raise capital from investors through the debt capital market. The bond issuer typically raises a fixed amount of capital from investors over a set period of time (the "maturity"), repaying the capital (the "principal") when the bond matures and paying an agreed amount of interest ("coupons") along the way.

A green bond is distinguished from a regular bond by being "labelled," that is, designated as "green" by the issuer or another entity, with a commitment to use the term.

The proceeds of green bonds (i.e., the principal) are used to finance or refinance "green" projects, assets, or business activities that benefit the environment. A green label can also be applied to a bond by another entity through inclusion in a green bond index (Box 3) or through a "tag" on widely used financial market analytical tools such as the Bloomberg Terminal.

WHERE DO GREEN BONDS COME FROM IN INDIA?

There are a few instruments by which legislatures, establishments, banks, and confidential financial backers can subsidize 'green' projects. They can be arranged into awards, risk relief items, value, and obligation. Project explicit awards, for example, for decentralized sunlight based scaled down matrices for country jolt are normally given by worldwide establishments and NGOs. Risk alleviation instruments incorporate credit improvement assurances and protection items. In guarantees, government organizations, development financial institutions (DFIs) or monetary administrations organizations can give confirmation to moneylenders covering fractional/whole installment in the event of a default by the borrowers. Green protection items give natural gamble responsibility inclusion and reimburse against environment/biological misfortunes. Under value, the DFIs can give beginning phase seed cash flow to launch a venture. Further, financial speculators and confidential value assets can put resources into such activities/resources for a possession stake or the overall population can likewise contribute by means of initial public offerings (IPOs).

BENEFITS OF ISSUING GREEN BONDS

o Enhances Issuer Reputation: The issuer benefits from branding and reputation management. Green Bonds enhance the issuer's reputation and highlight its commitment to long-term development.

o Public Relations that are beneficial: Green bonds can help to improve an issuer's reputation because they are an efficient way of doing so for a company to demonstrate its

environmental credentials. It lists the issuers. Dedication to the development and sustainability of the environment further, this could result in some positive publicity for the issuer.

o Return on Investment: Green bonds are a good investment option for investors looking for a good return on investment. Green bonds have a higher yield than other types of bonds.

o A secure investment: Green bonds, unlike other types of government bonds, are thought to be safe. However, it is recommended that you make your investment decision while keeping certain important factors and financial goals in mind.

o Financial backer Enhancement: There are explicit worldwide pool of capital, which are reserved towards interest in Green Endeavors. This wellspring of capital spotlights principally on ecological, social also, administration (ESG) related parts of the activities in which they plan to contribute. Hence, green bonds give a guarantor the admittance to such financial backers which they in any case will be unable to tap with a standard bond.

Therefore, Green bonds are one of the most prominent innovations in the area of sustainable finance over the past decade.

Overall, we find that the green bond market's bottom up growth is due to a strong match of incentives between issuers and investors. Green bonds are intended to be a familiar and low risk financial instrument that enables both investors and issuers to contribute to sustainability goals at a low cost. Green bonds, according to our respondents, do not play a significant role in shifting capital from unsustainable to sustainable investments.

REFERENCES:

1. Green Bond: A Systematic Literature Review for Future Research Agendas (Research Paper)

2. https://jcsr.springeropen.com/articles/10.1186/s40991 020 00056 0

3. https://www.mdpi.com/1911 8074/14/12/589/pdf

4. https://iopscience.iop.org/article/10.1088/1757 899X/804/1/012052

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