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October 2020 Vol 4 Issue 8
Our best read- Kya Multicap Funds ‘Sahi hai’
Special Mention: The New SEBI Rules: Protecting Investors or Regulatory Overreach
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INDEX
S.No. 1 2 3 4 5 6
Article Kya Multicap Funds ‘Sahi hai’ The New SEBI Rules: Protecting Investors or Regulatory Overreach India’s Inflation Targeting Regime : Is it a Delusion? Is Demonetization a Bridge for Financial Inclusion? Monopoly and Its Impact On Economy Economic Cost Of Air Pollution
Page No. 3 6 11 17 22 27
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Kya Multicap Funds ‘Sahi hai’ By Pratik Amrutkar (IIM Bangalore) Background Since the last few years, SEBI has been making considerable efforts in order to ensure mutual fund schemes are transparent and appropriate decisions are taken in the interest of the investors. In 2017, SEBI introduced asset categorization circular in this direction where they direct fund managers to classify their schemes in the following manner:
the top 100 stocks in terms of market cap have been classified as large-caps, 101-250 stocks as mid-caps, and below 250 all stocks are classified as small-caps all schemes need to be clearly distinct and classified in select categories
Before 11th September 2020, equity MF schemes were required to invest >65% of their AUM in equities with no specific requirement for category wise limits. With this background in mind, let me delve deeper into the agenda of the article. What the circular says As per the SEBI circular, all multi-cap funds need to allocate at least 25% of AUM in large-caps, mid-caps, and small-caps each. The rationale behind this move is to ensure these funds are true to their label, and their performance is benchmarked against the appropriate index. Currently, most multi-cap funds have > ~60% allocation in large-cap stocks, as we can see below, thus, they are not fulfilling the risk-return expectations of a multi-cap fund.
For instance, Kotak Multicap fund, which enjoys the largest AUM in the multi-cap category, benchmarks its returns against the NIFTY 200 index. Thus, the allocation of funds and benchmarking of returns, both are skewed towards large-cap stocks. One cannot blame the fund managers for failing to invest in small-caps. As we all know, the smallcap firms have very limited analyst coverage, low transparency, and liquidity in the market. Therefore, the results in flight to quality stocks (mostly large-caps) which ultimately leads to expensive valuations in a few firms. You might remember that DSP Blackrock stopped accepting fresh fund inflows in 2017 in their micro-cap funds for the 3rd time only because they did not find many attractive small-cap stocks & the overall valuations of these few scripts were already too high. (ET article)
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The impact Multicap schemes of mutual funds enjoy total AUM of INR 1.47 lakh crore as of August 2020, with 74% invested in large-caps, 16% in mid-caps, and only 6% in small-caps. The fund managers need to rejig their portfolio, which will naturally lead to selling in large-caps and the proceeds going to mid-cap and small-cap stocks. The expected impact is as follows
Outflow in large-caps – INR 35,500 cr Inflow in mid-caps – INR 12,700 cr Inflow in small-caps – INR 27,000 cr
Following options are on the table for the mutual fund industry a) b) c) d)
Return the money to unitholders Unitholders can be allowed to switch to other schemes Merging the multi-cap funds with other funds Convert the multi-cap scheme into others scheme
As expected, investors in anticipation of these inflows rushed to buy small-caps and mid-caps. As we can see from the below chart, both indices rose by 4-7%. Nifty Small Cap 100
Nifty Mid cap 100 6,049
610 0
600 0
177 00
7%
175 00
17,393
590 0
173 00
580 0
5,650
570 0
171 00
4% 560 0 169 00
16,766
550 0
167 00
540 0
165 00
530 0
18-Sep-20
17-Sep-20
16-Sep-20
15-Sep-20
14-Sep-20
13-Sep-20
12-Sep-20
11-Sep-20
10-Sep-20
09-Sep-20
08-Sep-20
07-Sep-20
06-Sep-20
05-Sep-20
04-Sep-20
03-Sep-20
02-Sep-20
163 00
01-Sep-20
520 0
If fund managers decide to abide by the circular and invest in small-cap stocks, it will take ~65 consecutive days to comply with the circular. Total traded volumes on NSE in top 100 small-cap stocks* % Delivery* Deliverable volumes MF’s share in daily volumes* Value of stocks that can be bought
INR cr. 3,469 40% 1,388 30% 416
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Total inflows as per new guidelines # of days required to comply Source: NSE; *assumptions based on market data
27,000 65
The Good and the Bad The obvious positives are higher liquidity and market depth in the small-caps. Another benefit would be easier capital access to new firms entering the small-cap space. Considering the small cohort of the well-researched small-cap universe, the rationale behind this move may be ill-founded. It is highly likely that the fund managers would double down on their existing small-cap & mid-cap portfolio since they have a comfort with these firms' business model and management. The end result will, therefore, be bloated valuations of a few small-cap stocks. Also, the asset categories mentioned above (2017 circular) are subject to change every 6 months; thus, a small-cap can move to the midcap category in the next 6 months. This will lead to higher portfolio turnover and higher costs for the unitholders because of the changes in the portfolio constitution. Conclusion The deadline to comply with the circular is 31st January. The two likely scenarios seem to be either SEBI relaxing the allocation thresholds or fund managers closing their multi-cap schemes. Source: https://www.sebi.gov.in/legal/circulars/sep-2020/circular-on-asset-allocation-ofmulti-cap-funds_47542.html
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The New SEBI Rules: Protecting Investors or Regulatory Overreach? By: Shagnik Chakravarty (Xavier’s College (Autonomous), Mumbai) Introduction On September 1st, 2020, the average daily cash turnover in BSE fell by 29% month-on-month as SEBI’s new margin rules came into effect. These rules, introduced by the Securities and Exchange Board of India, are designed to “protect investors’ interests, bring transparency, and prevent brokers from misusing client’s securities” (SEBI circular, 2020). Despite their noble mission, these reforms have received severe criticism for reducing stock-trading volumes and overextending SEBI’s regulatory reach. Whether good or bad, the new SEBI rules represent an important moment in Indian financial regulation, so let us discuss how they might affect the stock-markets. Background: Margin Trading, Risk and Volatility In finance, margin trading is when an investor borrows money from a broker to buy stocks. Here, ‘margin’ refers to the minimum collateral that the investor needs to deposit in order to borrow money. Margin trading is attractive because it allows investors to leverage their returns. While this can be rewarding, leveraging is a risky strategy as it multiplies gains as well as losses.
With over 400 registered stockbrokers, brokerage in India is a very competitive industry. In recent years, brokers had been offering larger and larger leverages in order to attract clients, with available reports showing that some stockbrokers offer up to 80-100x leverage. While this is attractive for both investors and brokers (they collect brokerage fees on a larger sum), it also raises their risk exponentially, thus making the markets more volatile. Research on S&P500 data has shown that high volatility reduces expected earnings, thereby discouraging investors and reducing net investment levels (Crestmont Research, 2017).
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Not only that, offering high leverages also jeopardises the capital of non-leveraged investors. This is because many brokers use the capital of non-leveraged investors to lend to margin traders, so if the latter defaults, the broker may not be able to return the deposits of its non-leveraged investors. A famous example here is the Karvy Stockbroking Ltd. disaster in 2019 when the broker illegally used the deposits of 95,000 clients for margin-lending and defaulted by Rs. 2000 crore. How SEBI Addressed These Challenges Margin: It is now mandatory for brokers to collect margins upfront from investors for equity transactions. The minimum required margin is 20% and it applies to both buying and selling of shares. Pledging: Previously, investors either had to transfer their shares to the broker’s account or assign Power of Attorney (PoA) to the broker. Under the new rules, the shares will remain in the investor’s Demat account and the investor can pledge their shares directly to the clearing corporation (a body of the exchange). PoA cannot be used for pledging anymore. Intraday trading: In stock trading, transactions take T+2 days to reflect in the investor’s account. Earlier, notional proceeds could be used as margin for a new trade, but under the new rule, investors will have to wait for the transaction to be settled before using the proceeds for a new trade. Accordingly, intraday proceeds can no longer be used for taking a new position in the same day. BTST (Buy Today Sell Tomorrow): Shares bought today cannot be sold until they are delivered into the investor’s account i.e. until T+2 days. Therefore, BTST trades will now require double the margin (once for buying, once for selling). Multi-Cap Mutual Funds Another significant reform came through SEBI’s September 11 circular which required multi-cap mutual funds to allocate a minimum of 25% of their portfolios to each small-cap, mid-cap and large-cap stocks. Presently, multi-cap funds are invested primarily in large-cap stocks, so this reform will require extensive portfolio restructuring, the impact of which will be discussed soon.
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Source: Author’s construction based on data from AMFI Impact on Markets: Safer but Smaller? Risk and volatility: Under the new system, the pledged shares will not leave the investor’s Demat account, so the risk from third-party defaults and broker fraud is now minimised. Further, by mandating a 20% upfront margin, SEBI has essentially banned excessively leveraged trades (now, 5x is maximum). This means that brokers can no longer compete on margins, so they will be forced to provide better service. This is likely to reduce volatility and protect market participants from excessive loss multiplication. The T+2 system and margin requirement on selling, although seemingly harsh, bridges the information gap between the exchange (NSE, BSE) and the depository (NSDL, CDSL) and is well-placed to curb short-selling, a move that is perhaps necessary to reduce speculation in the Covid-19 affected economy. Concentration of capital: Much of the charm of small and mid-cap stocks is in the possibility of large short-term returns. By tightening restrictions on leveraging and BTST, SEBI has taken away that charm while keeping their risk component constant. This may result in a further polarisation of the market as investors move from mid and small-cap to large-cap stocks which have the most depth and liquidity (NIFTY 100, for instance). Similarly, traditional offline brokerages will be adversely affected by the upfront margin rules as this will prevent them from offering margin privileges to their customers. As a result, retail trading is likely to become more concentrated around the top 10-20 brokers in India who offer online services. Volume: Research from Samco Securities (2020) suggests that around 30-40% of intraday turnover is due to additional leverage. So, the intraday rules, by increasing trading costs and margin requirements, are expected to shrink intraday turnover by at least 20%. Intraday turnover accounts for roughly 90% of the total turnover of stock markets, so this reduction in volumes is significant. Higher margin is also expected to discourage low-capital investors which can further reduce volumes. However, this effect of SEBI rules on trading volumes is likely to be somewhat offset
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by increases in retail investor numbers. For context, between March and June 2020, 2.4 million new Demat accounts (~10% of total) were opened and NSE internet trading volume rose by 53%. Impact of SEBI Rule on Multi-Cap Funds: Sr. No a b c d e f (=d) g
Allocation Multi-Cap Fund Industry Details Current Allocation (in %) Allocation (in Rs. crore) Balancing required to follow new guidelines Expected fund movement across market caps (in Rs. crore) Total Market Details Average total market caps (in Rs. Crore) Expected fund movement due to new SEBI rules on multi-cap funds (in Rs. Crore) Fund Movement as % of total market cap
Large-Cap
Mid-Cap
73% 1,06,880
22% 32,428
SmallCap 5% 7,221
-23%
3%
20%
-33,702
4,396
29,306
1,01,25,722
21,26,829
14,29,949
-33,702
4,396
29,306
-0.33%
0.21%
2.05%
Source: Authors calculations based on data from AMFI The total AUM of mutual funds is Rs. 27,49,000 crores (Sep 2020), so the expected outflow from large-caps (Rs. 33,702 crores) is 1.22% of total AUM. Further, as the table shows, the fund movement across market-caps due to the SEBI circular will be between -0.33-2.05% of total market-cap. This means that the expected outflows are too little to have any long-term effect on either the mutual fund industry or the different market-cap stocks. In the short-run, however, smallcap stock prices may rise substantially due to increase in demand. In any case, the increase in exposure to small and mid-caps will make multi-cap funds much riskier, and this may cause many investors to shift from this category of mutual funds. Criticism As we found, SEBI’s reforms have indeed made investing more secure. However, two cases of regulatory overreach can be made. First, the outright banning of high leverages in intraday trading. SEBI’s aim to protect investors from third-party defaults are anyway achieved through the pledging system, and while a margin limit should exist to control risk, a maximum of 5x leverage is felt by most to be too low a limit. In the coming years, this will significantly reduce flexibility in investor strategy. Here, perhaps additional leverage could have been allowed as long as it was from the broker’s account. Second, SEBI’s rule on dictating the portfolio structure of multi-cap funds. The problem with allocation rules in absolute percentages is that it disregards market conditions. Previously, fund managers could move across market-caps based on where they saw value, and depending upon their explanations of why, for instance, an 80% large-cap holding was necessary at a given point,
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the investor could choose to either shift funds or not. Now, that flexibility is gone. Multi-cap funds will be forced to hold small-caps even when the category is incurring losses. Here, SEBI could have instead focussed on improving investor-fund communication to address the problem of ‘mislabelling’ rather than imposing a blanket rule on market-cap allocation. References https://www.sebi.gov.in/legal/circulars/jul-2020/collection-and-reporting-of-margins-by-tradingmember-tm-clearing-member-cm-in-cash-segment_47220.html https://www.sebi.gov.in/legal/circulars/sep-2020/circular-on-asset-allocation-of-multi-capfunds_47542.html https://www.crestmontresearch.com/stock-market/ https://www.amfiindia.com/research-information/amfi-quarterlydata https://www.moneylife.in/article/intraday-trading-in-stock-markets-to-be-hit-by-new-sebirule/60973.html https://www.businesstoday.in/markets/market-perspective/sebi-new-margin-rules-daily-cashturnover-plunges-29-fo-stable/story/416079.html https://www.livemint.com/mutual-fund/mf-news/why-sebi-s-9-11-strike-on-mutual-funds-hasmisfired-11600792676946.html https://www.moneycontrol.com/news/business/markets/what-do-sebis-new-margin-rules-meanfor-investors-brokers-explain-5786861.html
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India’s Inflation Targeting Regime : Is it a Delusion ? By : Jigisha Lonhare & Shouvik Dey (RCOEM, Nagpur) “Inflation poses a serious threat to the growth momentum. Whatever be the cause, the fact remains that inflation is something which needs to be tackled with great urgency…” [Dr. Manmohan Singh, Prime Minister of India, February 4,2011, New Delhi] In the year 2015, the Reserve Bank of India (RBI) formally adopted the concept of Flexible Inflation Targeting (FIT) after signing the Monetary Policy Framework Agreement (MPFA) with the Government of India on February 20. Following the recommendations of the Urijit Patel Committee, a six member Monetary Policy Committee was constituted to provide a statutory framework in February 2016. The RBI Act, 1934 was amended in May 2016 in order to implement the FIT framework and a target of 4% with ± 2% tolerance level for inflation was set in terms of the Consumer Price Index (CPI) to be renewed after every 5 years. It was mandated with the task of driving the key policy variable i.e. the Interest Rate with Inflation Rate as the nominal anchor. However, India has been witnessing a high inflation, rising beyond the comfort zone and loosing the financial & economic stability. This led to a series of uncertainty among the experts and policy makers.
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Need for FIT Framework ? India has a history of moderate inflation in contrast with other developing countries of the world. However, there were instances of inflation being surging beyond 10%, four times since 2010. It is illustrated in the table given below : Year June 2010 August 2010 September 2010 December 2013
Inflation Rate 13.9% 13.7% 11.3% 11.24%
This monetary policy framework is well suited for countries that have witnessed a high rise in inflation soaring beyond 8 – 9%. Such abrupt rise/fall in inflation rate is a rare sight in India. Ergo, the exercising of FIT framework in India, as of now, seems questionable and rather than targeting a specific level, focusing on controlling inflation based on multiple indicator approach makes much sense. Interest Rate Transmission Mechanism and Fischer Hypothesis Assuming the RBI increases the key policy interest rate and conducts Open Market Operations with the view that the interest rate in the money market adjusts to the new level. This will prompt the banks to adjust their rates on time deposits resulting in tight monetary conditions. This in turn will invoke households and corporations to save their free financial resources at higher rates than to spend them. As a result, the aggregate demand will decline in the short run. Cumulatively, it will alleviate pressures on the marginal costs of producing domestic goods, eventually decreasing the inflation levels. The indicated inverse relationship between the interest rate and inflation is reflected in the Fisher Hypothesis, a proposition by the American economist Irving Fisher. It equates the real interest rate with the differential of nominal interest rate and expected inflation rate. On this account, the real interest rate will depreciate with the elevation in inflation rate, provided the nominal interest rate appreciates hand in hand with inflation rate. The Fisher Hypothesis is approximately given by the following equation :
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Neo – Fisherism : A Radical Approach This approach was recently proposed by Stephen D Williamson, a professor of economics at the University of Western Ontario, USA, in an article The Regional Economist. He wrote : “Neo – Fisherism says…that if the central bank wants inflation to go up, it should increase its nominal interest rate target, rather than decrease it, as conventional central banking wisdom would dictate. If the central bank wants inflation to go down, then it should decrease the nominal interest rate target.”[1]
Figure 1 : Neo-Fisherism [2]
Neo - Fisherism approach can be partially seen in India as illustrated in Figure 1.
Figure 2: Key Policy Variable vs Target Variable Source : Author Data : Data Base of Indian Economy, RBI
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Inflation Expectations The increase of the interest rate today may be part of a sequence of increases that RBI envisages to take place over some time going forward. RBI might communicate that such a sequence of increases is possible by publishing the forecast of the policy rate for some time going forward. Banks and other financial firms realize that the cost of liquidity, cost of reserve money in the money market and the expected trajectory of the future policy interest rate have changed. As a result, the market participants will start repricing their financial products. For example, banks will adjust their rates on time deposits. Therefore, higher current and expected real interest rates would lead economic agents to expect that aggregate demand and output will decelerate in the future. They will also expect lower costs of domestic production factors going forward. This lower expected cost will lead to lower expected inflation. Therefore, when setting prices in the current period, producers will take account of expected inflation. Hence, lower expected inflation will feed back into lower current inflation. Monetary Policy Report (October 2020)[3] and Inflation Expectations Survey of Households (IESH) 2020 [4] concluded that households and firms did not form their inflation expectations based on RBI’s inflation target and the above monetary policy framework.
Taylor Principle and Inflationary Spiral Monetary policy rule must satisfy the Taylor Principle to ensure a unique equilibrium.
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The principle states that whenever inflation moves by 1%, the interest rate must move in the same direction by more than 1% i.e. đ?›ż > 1 . Suppose this principle is disobeyed, the nominal rate will increase but less than the increase in inflation. As a result, the real interest rate will decrease thus boosting the aggregate demand (IS Curve). This will require additional production that will be met at a higher marginal cost, leading to the ascend in inflation. Therefore, an inflationary shock led to a response of the central bank that induced an additional increase in inflation. So, this increase in inflation will lead to another round of weak response by the central bank, decreasing the real interest rate and increasing inflation. Thus, the policy makers must take into account the Taylor Principle to avoid such inflationary spiral. Conclusion Although there are many doubts about the rationality of Inflation Targeting in our country, the above arguments gives enough justice to our assertion. As mentioned by Dr. Raghuram Rajan in his recent book The Third Pillar, there is a need to reinforce the third pillar of community and civic society with an eye to tackle the current inflation problem. He writes, “When any of the three pillars weakens or strengthens significantly, typically as a result of technological progress or terrible economic adversity, the balance is upset, and society has to find a new equilibrium.â€? [5] If the high inflation continues to grow, then there is hardly any choice left for the weaker sections, but to sit and watch shattering their living existence, making inflation the worst tax on them. High inflation seems to be ruining the personal wealth of the third pillar than any taxation imposed by the government. 
The authors are pre-final year BE Electrical Engineering students at Shri Ramdeobaba College of Engineering and Management, Nagpur.
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References 1. https://www.stlouisfed.org/publications/regional-economist/july-2016/neo-fisherism-aradical-idea-or-the-most-obvious-solution-to-the-low-inflation-problem 2. https://www.bruegel.org/2015/07/blogs-review-understanding-the-neo-fisherite-rebellion/ 3. https://rbidocs.rbi.org.in/rdocs/Publications/PDFs/MPR0910200CB2848C2D8A40758A1 FB7AE110E3F16.PDF 4. https://m.rbi.org.in/scripts/PublicationsView.aspx?id=19982 5. http://dln.jaipuria.ac.in:8080/jspui/bitstream/123456789/4237/1/The%20Third%20Pillar%20%20Raghuram%20Rajan.pdf
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Is Demonetization a Bridge for Financial Inclusion? BY GITIKA SHAILI BARANWAL
Financial inclusion is where individuals and businesses (especially vulnerable groups such as weaker section and low- income groups) have access to useful and affordable financial products and services which meet their needs responsibly and sustainably. Who are these Vulnerable Groups? Unprivileged segment in rural and urban areas, farm and industrial workers, people in unorganized industries, unemployed residents, women children and the elderly. Why Financial Inclusion in India?
Bank Account- It acts as a liquid asset where people can mobilize their savings and can use it at the time of emergency.
Encourage Savings habits- Poor can use their savings and hence are not dependent on moneylenders.
Credit- It is an important source of survival for poor, framers, businessmen, etc. which should be given at an affordable rate.
Insurance- It is risk management means, used to protect people from losses incurred.
Payment and Remittance- To provide easy mode of getting remittance and payment methods.
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Twin aspects of financial inclusionFinancial Inclusion and Financial Literacy and innovation are two important pillars. Financial Inclusion stimulates the supply side, by providing financial products and financial services at a reasonable price. While financial literacy and financial inclusion technology stimulates the demand side. Thus, this results in financial product development and capital mobilization RBI and Government initiatives
No Frill Accounts
Overdraft in current bank accounts
Basic saving bank deposit account
UPI based payment
Pradhan Mantri Jan Dhan Yojana
Lead Banking Scheme
Simplification of KYC (Know Your Customers) Norms and Guideline
Kisan Credit Card
Opening of branches in unbanked rural locations
Rural Infrastructure Development
Self Help Group Bank Linkage Program
Business Correspondents and Business Facilitators model
Establishment of Fund for Financial Inclusion and Fund for the Advancement of Financial Inclusion Technology.
Financial Inclusion during COVID 19 In the Indian financial markets, during COVID 19, financial inclusion was more promoted mainly, because of the concept of “Work from Home”. Thus, the introduction of innovative technological solutions, increased smartphone penetration and the availability of data services have already sparked a digital payment system and digital lending revolution. Did Demonetization accelerate Financial Inclusion?
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The Indian government declared on November 8, 2016 the demonetization of all the Rs. 500 and Rs. 1,000 banknotes from the Mahatma Gandhi Collection. It also announced that the demonized banknotes will be replaced with new Rs. 500 and Rs. 2,000 banknotes. Demonetization had a strongly positive impact on financial inclusion, leading to increased account registration, active and advanced use of registered accounts, electronic payment, and other digital transactions. Demonetization leads to Digitalization which promoted financial inclusionPost Demonetization, government took measures to promote cashless transactions. This benefited Digital payment companies including banks, as there was increase in the number of digital transactions. Online payment was a major contributor to monthly digital transaction. Digital transactional channels offer additional financial inclusion benefits by supplying both a means of accessing additional financial services, such as interest-bearing deposits, online payments, loans, insurance and even investment products. Demonetization has a very positive correlation with increased financial inclusion compared to previous policiesThe total balance in the steadily rising Jan Dhan accounts was at Rs 97,665.66 crore as at April, 2019. While Rs.15.30lakh crore was deposited with the banking system out of 15.41 lakh crore as at August, 2018. An increase in the proportion of the population for keeping a registered financial account was more in case of demonetization when compared with Jan Dhan Yojana. Post demonetization, financial inclusion increased among women and rural residents- Gap among male and female, rural and urban resident reduced. Making online remittances on savings bank accounts free from January 2020 via the National Electronic Funds Transfer (NEFT) and Real Time Gross Settlement System (RTGS) facilities is really important to encourage digital inclusion. The services are now also being made available 24/7, allowing for a fast transfer of funds around the globe. Banks have started to broaden the base of alternative electronic distribution networks at a much faster pace, as smartphone and network connectivity, and Internet services have been made
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accessible and affordable to people. As a result, the number of point-of-sale terminals rose from 12,11,890 in September 2015 to 45,89,727 in September 2019, while the number of debit cards increased from 604 million to nearly 835 million in the same time period. Small financial Banks are also asked to pursue financial inclusion for the benefit of the weaker sections of people. Steps to be taken to promote Financial Inclusion
The formal/ informal institution should be able to coordinate and spread financial awareness at the grassroot level.
Proper utilization of financial and digital infrastructure and financial technology like blockchain, AI, etc.
To create social awareness and highlight the benefits of the formal financial system and financial inclusion.
Business correspondents in villages can act as an essential part of voluntary change agents.
With the launch of the GST, FASTags and other online daily utilities, the digital culture is spreading rapidly. Thus, financial literacy is necessary.
Government will assign pre- set financial inclusion goalposts for RBI, IRDA, SEBI, and other economic and financial regulators.
India had 35 Global Findex in 2011, 53 in 2014 and 80 in 2017. It represents a rapid improvement in Financial Inclusion, indicating that key Indian policies have performed well in the last few years. ConclusionDemonetization has a positive impact on financial inclusion. Now digital inclusion is also known as financial inclusion as maximum of the financial products can be purchased/ financial services can be rendered through the use of internet. Therefore, financial literacy programs in villages and rural areas (especially with regard to the use of digital platforms for financial transaction) are
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required. This creates more banking opportunities for rural people, offers more user-friendly digitalization banking services, and creates more effective digital financial security awareness initiatives for digital financial inclusion.
REFERENCEFinancial Inclusion in India by RBI - Initiatives Taken and Its Benefits. (2019, November 22). Retrieved from https://www.toppr.com/guides/general-awareness/financial-banking-institutionsin-india/financial-inclusion/ Deposits in Jan Dhan accounts fast inching towards Rs 1 lakh crore mark. (2019, April 21). Retrieved from https://economictimes.indiatimes.com/industry/banking/finance/banking/deposits-in-jan-dhanaccounts-fast-inching-towards-rs-1-lakh-crore-mark/articleshow/68976345.cms?from=mdr 99.30% of demonetized money back in the system, says RBI report. (2018, August 30). Retrieved from ideas For India. (n.d.). Financial inclusion in India: Progress and prospects. Retrieved from https://www.ideasforindia.in/topics/money-finance/financial-inclusion-in-indiaprogress-and-prospects.html
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Monopoly and Its Impact On Economy By: P. Prudvi Teja (SIBM Bengaluru) Standard Oil, the world’s first oil refinery which once was the world’s largest multinational corporation, was broken down into 34 smaller companies in the year 1911 in a landmark judgement which declared the corporation as an illegal monopoly. The allegations it faced were Engaging in anti-competitive practices, horizontal and vertical integration of the entire refinery process, not allowing the newer players to compete.
Figure 3 - Standard Oil divided into smaller companies Source – www.mazdaofnorthmiami.com Although initially, the breakdown was looked down by the dominant players, history is evident of the fact that it not only promoted a healthy rivalry but also helped in the emergence of newer players. And not just that, the company’s subsidiaries and sister companies benefited from this, which might sound ironical!
This concept of breaking down the companies is called ‘Antitrust’. In the United States, antitrust law is a collection of federal and state government laws that regulates the conduct and organization of business corporations to promote competition for the benefit of consumers.
Initially, it's the country that supports the growth of a company, but as it grows in size and number, ironically it's the company that supports the country. Once the corporation goes bankrupt, the country uses all of its resources for the sustenance of the corporation. ‘Too big to fail’ is the phrase which is often thrown around to justify it. Be it banks or corporations, millions of taxpayers’ money is pumped to keep them functioning.
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‘Too Big To Fail (TBTF)’ – This phrase became famous after the 2008 crisis. The corporations were financially so intertwined with the other corporations that the failure of one assured the doom of the other corporations. This forced the governments all around the world to save them by using various methods and impose new constraints.
How do a few companies grow and attain such immense power?
Any company that creeps in to occupy various segments of the market by diversifying its portfolio and then uses its power to tweak the market is practicing ‘monopoly’.
Monopolies control the supply and trade of either one or multiple segments of a market. In some economies there is duopoly where two players dominate the markets, while in some there is oligopoly where a few sellers are at the helm. Either way, the result is the same – Distortion of free-market practices.
Figure 4 - Apple and Google facing allegations from Epic Games Inc. Source – www.marketwatch.com Tech giants like Google, Facebook, Amazon and Apple have been facing allegations for distorting the market by setting up the prices and stifling the competitions. These companies wield a significant portion of the power because of the network effects, which means the more the people post content on a platform, the more useful the platform becomes. The recent litigations by the Epic Game Inc.’s against the online stores of Apple and Alphabet Inc.’s Google highlight the issue where they are forced to pay a hefty amount of 30% tax.
But how does a monopoly affect an economy?
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Let us understand this by looking at the infographic:
Figure 5 - Infographic - Monopoly and its impact on economy Source: Author’s contribution Does India face the threat of monopoly?
Before the 1991 LPG reforms, we saw the stringent rules of MRTP (Monopolistic and Restrictive Trade Practice) Act, 1969, and FERA (Foreign Exchange Regulation Act), 1973, which restricted the monopoly of a single company. These Acts reflected our colonial insecurities. Although regressive and stifling, these Acts in a way achieved their purpose but caused almost irreparable damage to the economy.
But after the announcement of the new economic policy in 1991, a plethora of sectors were thrown open to the private domain. Although initially there seemed to be a concentration of wealth, the economy underwent a drastic change from 2007.
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As per the India Brand Equity Foundation (IBEF), internet penetration in India grew from just 4 percent in 2007 to 52.08 percent in 2019. This paved way for the rapid expansion of Ecommerce. Initially, we saw varied types of entrants with various new offerings, but as the time progressed two major players emerged – Flipkart and Amazon.
This trend is seen in the telecom sector too. Reliance’s Jio with its impressive disruptive strategies captured the entire market within a few months. The Adani Group is following the suit by dominating the aviation sector.
Isn’t it a good thing that the homegrown companies are now rising?
It is a tremendous achievement by the firms, and one should be proud of their achievements. In just a few years, the homegrown companies are setting an example of how an organisation should perform by catering to the needs and tailoring the products as per the demographics requirement.
But dominance is an endemic to many other sectors in India economy. A recent survey by Capitaline Databases found that out of 2035 listed companies across 298 industry groups, 50% of the net sales in a sector are captured by only one company. The above said examples are now capturing the market at such a rapid pace that the smaller niche start-ups cannot compete.
Having fair competition isn’t just a necessity to ensure fair play, but it also makes the companies be on their toes and continuously develop by making themselves better.
Conclusion:
Competition leads to better products and innovative ideas. They not only increase their production capabilities but also provide employment opportunities to the people, which increases their purchasing power by having disposable income.
We can see a ripple effect in countries where the free market instruments are efficiently placed and diligently followed. The path to economic prosperity has had many setbacks, but we are striving hard to make it impartial by promoting wealth and prosperity on a level playing ground.
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References:
https://en.wikipedia.org/wiki/United_States_antitrust_law https://www.marketwatch.com/story/will-videogames-be-the-achilles-heel-for-big-techin-antitrust-investigations-2020-08-21 https://www.ibef.org/industry/ecommerce.aspx https://www.livemint.com/news/india/why-antitrust-is-a-jumbo-indian-problem11596375452543.html
Photo references:
https://www.marketwatch.com/story/will-videogames-be-the-achilles-heel-for-big-techin-antitrust-investigations-2020-08-21 https://www.mazdaofnorthmiami.com/history-of-miami-henry-flagler-3-of-5-2/
Infographic drive link:
https://drive.google.com/folderview?id=1MEbPIOOukz_LqfWcBULr8yBAYLJhAcOS
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ECONOMIC COST OF AIR POLLUTION By – Kashish Dabas and Vibha Solanki (International Management Institute – New Delhi)
Donald Trump in his very recent presidential election debate made one of the most controversial and sensitive statements of current times ‘Look at China, how filthy it is, look at Russia, look at India, it’s filthy, the air is filthy’. The topic of air pollution has become the talk of the town and the reason for which Donald Trump used it was to show his country superior to others. Air pollution has been in discussion for years. The situation is worsening day by day and the problem is adversely impacting the lives of citizens. Nowadays we all breathe heavy smoggy air, look at dull grey skies and this dense blanket of polluted air is engulfing all of us, having a detrimental impact on the economic, physical and social resources of the country. The economic burden of this devastating problem is astonishingly high. Conversations about different types of pollution have been revolving around along with other environmental concerns for quite some decades now. Different NGOs and agencies have been working round the clock to resolve the issue. In order to increase exports and becoming the economic super power different nations have been producing much higher than domestic consumption resulting in increasing pollution levels. Everything done, intentionally or unintentionally comes with a cost.
Now let’s take a glimpse of this “FILTHY AIR” economic cost: ● In 2018, an approximation of US $2.9 trillion (which is equivalent to 3.3% of global GDP) has been estimated as the cost of air pollution by CREA in a report ● WHO stated that globally on an average 4.2 million premature deaths are linked to air pollution. ● A research states that 1.8 billion work-days were lost due to PM 2.5 pollution resulting in huge economic cost due to air pollution ● According to a research conducted in 2016, financial impact considering healthcare cost due to Air Pollution around the World is US $595.6 bn ● As per a report, in 2018 the cost of chronic diseases, sick-leaves and preterm births to World economy was $200 bn, $100 bn & $90 bn respectively
The above stated are a few quantifiable costs out of many and have been recorded and reported in different print media and researches.
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In a study in 2019 it was found that air pollution is the fourth highest risk factor out of 87 health factors taken into account globally. Highlighting a few physical and health related issues which are not-cost quantifiable: ●
Increased risk of Asthma, Respiratory infection, Stroke, Cardiovascular diseases, etc
● Effect on learning of children due to increased diseases due to air pollution and their guardians taking off to take care of them ●
Air pollution linked premature birth increases healthcare cost for lifetime
●
Work absence of adults due to major & minor diseases caused by air pollution
Economic output is affected by air pollution theoretically via 4 ways: 1.
Affecting the working population size (migration and deaths considered)
2. Working hours of workers are reduced due to ill health of self or someone in close relation which affects psychologically 3.
Productivity of workers is reduced
4.
Natural capital quality is affected which is input for specific sectors. Eg: Agriculture
Source: WHO’s report on Ambient air pollution: Health impacts Putting all the factors above factors into a formula of Economics Framework: Y = Y (K, L, P) Y - Economic output K - Capital input L = Effective labour input/ force available for work P - Population Now, L = N(P) φ(P), where N(P) is the population as a function of level of pollution & φ(P) reflects impact of pollution on worker productivity t = Total endowment time of each household s(P) = Measurement of time for which household is sick and cannot work Y = Y (K, N (P) φ (P)[t - s (P)], P)*
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And hence all the aforementioned factors can be put into the formula which can now be accounted for and with the correct values taken the effect of all the factors can be seen in the result. *Pollution is being considered as an exogenous variable in the above formula
Source: Original Research Paper of The Authors. Published by Elsevier Inc. on behalf of Icahn School of Medicine at Mount Sinai printed in 2016. Air pollution is same for all irrespective of income, caste, creed or gender and same is the disease caused by it. But getting the required treatment done is not equitable for all and the same is being represented by the above in the graph in terms of income of the country.
Source: Greenpeace. Center for research on energy and clean air The above chart describes the cost of “Filthy Air” for various nations. For e.g. for China it is 6.6% of its GDP which is equal to $900 billion/ year, for the US the same is 3% of GDP i.e. $600 billion per annum while for India it is 5.4% of GDP amounting equal to $150 billion per year on average while when talking about cities then Delhi with 5.9% of GDP tops the list followed by Beijing.
Source: Blog on revealing the cost of air pollution in world’s cities - in Real Time by Centre for Research on Energy and Clean Air
Source: OECD published data titled “The Economic Consequences of Outdoor Air Pollution” on June 9, 2016 The current cost bearing by an economy is known to us now but we also need to know the future of continuing on the same line. As projected above GDP of ‘Rest of Europe & Asia’ will be worst affected by air pollution by 2060 among various economies with Healthcare Expenditures taking the highest toll. All nations have understood the depth problem and have been working to tackle it. Almost all nations have made different policies to reduce the air pollution. Few general practices adopted by various nations have been highlighted in the below diagram. Apart from the general measures countries are also trying for different other area specific solutions. In 2016, China built a $2 million air purifying tower in Xi’an dubbed with solarassisted large scale cleaning systems. A 19% drop in PM 2.5 over 3.86 square miles in the tower’s vicinity was recorded after installation. India too installed an air purifying tower in Delhi at a much smaller scale at a cost of Rs. 7 Lakh. Keeping the enormity of the problem, various top
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nations are devising solutions to combat this catastrophic situation. Various other solutions are also being devised now and then in order to mitigate the impact and improve the quality of life of individuals which is adversely being affected due to air pollution. Reference 1. Niall McCarthy, The global economic cost of air pollution, World Economic Forum 2. Dechezleprêtre Antoine, Rivers Nicholas and Stadler Balazs, 2020 Aug 26,The Economic Cost of Air Pollution: Evidence from Europe 3. Myllyvirta Lauri, 2020 July 9, Revealing the Cost of Air Pollution in World’s Cities – in Real Time, CREA 4.The Global Asthma Report 2018 5. The Economic Consequences of Outdoor Air Pollution, OECD Report 6. The cost of air pollution, OECD 7. Air Pollution Killed More Than 16 Lakh People in India Last Year; Poses Fourth Highest Death Risk Globally: Report, TWC India 8. Finding Solutions to Air Pollution in India: The Role of Policy, Finance, and Communities, ORF Special Report 9. Several other newspaper articles related to stats of air pollution
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