MSMEs in India – Growth Catalyst

My write up which appeared in the Cover Story of April 2019 issue of Monthly Economic Digest Published by Maharashtra Economic Development Council.

MSMEs in India – Growth Catalyst

India has the largest number of entrepreneurs in the world and it produces the largest number of entrepreneurs in a year. According to the latest survey by Dun and Bradstreet, there are 81 mn economic entities in the country (excluding entities involved in crop, public administration and defense). Many of them are single-person units operating from huts in villages, non-permanent structures. Excluding these entities, there are over 27 mn entities which could be termed as ‘commercially visible’. MSMEs account for around 99.9% of these 27 mn entities, they contribute to 35% of India’s GDP and employ 25% of India’s non-farm workforce.

MSMEs provide large employment opportunities at lower capital cost than large industries. At present, more than 15 crore are being employed in the MSME sector. The MSMEs in India are defined

 as follows :

Manufacturing Sector
Enterprises	Investment in plant & machinery
Micro Enterprises	Does not exceed twenty five lakh rupees
Small Enterprises	More than twenty five lakh rupees but does not exceed five crore rupees
Medium Enterprises	More than five crore rupees but does not exceed ten crore rupees
Service Sector
Enterprises	Investment in equipments
Micro Enterprises	Does not exceed ten lakh rupees:
Small Enterprises	More than ten lakh rupees but does not exceed two crore rupees
Medium Enterprises	More than two crore rupees but does not exceed five crore rupees

The enterprises go through an evolution, they evolve from micro to small to medium and then large entities. In developed markets, around 50% of the entities are micro and 40% are small/medium. In India, over 95% of total entities are micro and 4% are small/medium. Indian micro enterprises are finding it difficult to scale up and grow into small and medium sizes. The challenges they face in India are , access to finance, availability of adequate infrastructure, availability of skilled labour and inadequate power supply. Considering the contribution of MSMEs to the Economy, lot of new government initiatives were taken by the government to accelerate the growth of the MSMEs.  To support the MSMEs, RBI has constituted a committee in the month of March 2019 to enable higher level of funding to the MSMEs in India.

Realising the contribution, the MSMEs can make it to the Indian Economy , several initiatives were taken by the Government. The ministry of MSME plays a key role in accelerating the growth of the MSMEs.  A special cadre of officers has been created in the Ministry to focus only on MSME sector and those who join this cadre will mainly work in MSME department in their career.

One of the issues , relating to MSMEs is the access to the credit. As per the survey of Dun and Bradstreet, only 4% of micro enterprises have access to the format credit. This is one of the major challenges for the growth. To make this process simple, the government had introduced the Mudra Scheme. This scheme is operated under SIDBI and it refinances the loans given by Banks and NBFCs to the enterprises , which avail the loans under the Mudra scheme. In the year , 2017 – 2018, Mudra loans disbursed amounted to Rs.2,46,437 cr and in 2018 – 19 , so far, the loans disbursed amounted to Rs.2,02,668 cr. The total loans disbursed under this scheme stood at Rs.7.23 Lakh crore and more than 15.56 crore people benefited from this scheme. This scheme has benefited many in the new economy sector including those who are focussed on selling their products through e – commerce and those who wanted to run ride hailing services. Many enterprises were created in Food and service sector and small scale manufacturing and they are using the e commerce platforms.

Start up India Scheme. Startup India Scheme is an initiative of the Indian government, the primary objective of which is the promotion of startups, generation of employment, and wealth creation. It was launched on the 16th of January, 2016 . Under the scheme, New-entrants are granted a tax-holiday for three years. The government has provided a fund of Rs.2500 crore for startups, as well as a credit guarantee fund of Rs.500 crore rupees. The Eligibility For Startup Registration  is as follows and many have availed this scheme.    

• The company to be formed must be a private limited company or a limited liability partnership.
• It should be a new firm or not older than five years, and the total turnover of the company should be not exceed Rs. 25 crores.
• The firms should have obtained the approval from the Department of Industrial Policy and Promotion (DIPP).
• To get approval from DIPP, the firm should be funded by an Incubation fund, Angel Fund or Private Equity Fund.
• The firm should have obtained a patron guarantee from the Indian patent and Trademark Office.
• It must have a recommendation letter by an incubation centre.
• Capital gain is exempted from income tax under the startup India campaign.
• The firm must provide innovative schemes or products.
• Angel fund, Incubation fund, Accelerators, Private Equity Fund, Angel network must be registered with SEBI ( Securities and Exchange Board of India).

Skill India Scheme. One of the challenges, MSMEs  face today is availability of talent. To overcome this , skill development initiatives were taken at both Centre and state levels and there is an objective to train more than 50 cr people in the coming years. The model will be focussing on Vocational training similar to the vocational training system in Germany. Under this scheme , Pradhan Mantri Kaushal Vikas Yojana (PMKVY) was introduced and it  is the flagship scheme of the Ministry of Skill Development & Entrepreneurship (MSDE). The objective of this Skill Certification Scheme is to enable a large number of Indian youth to take up industry-relevant skill training that will help them in securing a better livelihood. Individuals with prior learning experience or skills will also be assessed and certified under Recognition of Prior Learning (RPL). Under this Scheme, Training and Assessment fees are completely paid by the Government.  In four years, this scheme is likely to benefit more than 10 million youth.

Cluster development Scheme. Industrial clusters play a major role in development of Industries in a country. Government of India  has adopted the Cluster Development approach as a key strategy for enhancing the productivity and competitiveness as well as capacity building of Micro and Small Enterprises (MSEs) and their contribution. A cluster is a group of enterprises located within an identifiable and as far as practicable, contiguous area and producing same / similar products / services. The essential characteristics of enterprises in a cluster are (a) Similarity or complementarity in the methods of production, quality control & testing, energy consumption, pollution control, etc., (b) Similar level of technology & marketing strategies / practices, (c) Similar channels for communication among the members of the cluster, and (d) Common challenges & opportunities. By part of being a cluster, MSMEs will find it easy to source raw material and buyers for the products. Further, the common costs are being shared among the enterprises operating in the cluster. There are various subsidy schemes operated by Centre and States and in many clusters, the participating companies have to incur only 10% of the total cost of cluster development.

PSU procurement. One of the challenges for MSMEs is to find buyers for their produce. To facilitate the demand creation for MSMEs, government has created a scheme , whereby , Now it is mandatory for all Central PSUs to take membership of the Government e-Marketplace (GeM) and they will put their purchase requirements in the market place,  which MSMEs can identify easily and participate in the process. Now, PSUs have to procure, at least a quarter of their requirement (25%) from MSMEs. With a view to encourage , more women to pursue entrepreneurship, out of the 25% procurement mandated from MSMEs from PSUs, 3% has been reserved for women entrepreneurs. A website has been created under the brand of MSME Sambandh and all the procurement notices of PSUs have to be placed on the website. In the previous financial year, more than Rs.25,000 cr was procured from MSMEs and this is likely to cross Rs.30,000 cr, this year.

Digitisation. To make the procedures simple, the government has embarked on several initiatives. The MyMSME is portal for web based application module to submit and track online application under the various schemes of the ministry.  Under the Udyog Aadhhaar Memorandum, mobile friendly application could be used for registration of MSMEs on self – certification basis. MSME Samadhaan scheme has been created to resolve the issues of delayed payments to MSMEs. Further, the digitisation and Introduction of GST has brought many MSMEs into the formal economy and this is helping MSMEs to build a credit profile and enable credit ratings by Credit rating agencies. This enables MSMEs to avail the formal channels of finance.

Some of the recent initiatives of the government include , approval of Rs.1 crore loan in 59 minutes, rebates in interest to be paid by them, Trade Receivables e- Discounting System (TReDS) , e market place for MSMEs, Cluster development subsidy for pharma companies, single annual return to be filed for   compliance matters , simplifying the factory inspection procedures and certain exemptions from punishment for minor violations.

In conclusion, a good , supportive and growth oriented , eco system has been created for the MSME development in India and various initiatives are being taken to create effective implementation policies and procedures. By creating an awareness among all the MSMEs about the various schemes and ensuring inter – departmental coordination in the government, the potential of MSMEs can be fully capitalised for a higher economic growth.

MSME Lending fuelled by Digitisation

The Article which appeared in Free Press Journal on 14th March 2019

MSME Lending fuelled by Digitisation

written by R Kannan March 14, 2019 9:01 am

MSMEs play a major role in Economic development of India. There are around 63.4 million units and they contribute to 6.11% of the manufacturing GDP and 24.63% of the GDP from service activities and 33.4% of India’s manufacturing output. They have been able to provide employment to around 120 million persons and contribute around 45% of the overall exports from India. The sector grows at a rate faster than the large ones at more than 10% pa.

About 20% of the MSMEs are based out of rural areas.They provide employment to more than 130 million people and contribute to 45% of exports. MSMEs are also the largest employment generator every year. As of Sep18, the total credit in India was Rs 105.5 Lakh crores and MSMEs had borrowed Rs 24.7 Lakh cr. Large and Mid Caps borrowed Rs 44.4  Lakh cr. Year on Year the growth of overall commercial credit was at 13.5%.

Micro loans which are less than Rs1 cr grew 22.2% year on year and SME loans between Rs1 cr – Rs 2.5 cr grew at 18.3%.The growth was faster than the overall growth. Share of NBFCs in SME credit increased from 13% in Sep 15 to 17% in Sep 18. The number of NBFCs lending more than Rs 100 cr to MSMEs stood at 77 at the end of Sep 18.

The lending to MSMEs is an attractive business since, the interest rate charged are higher, the NIM margin is higher, the NPA ratio is lower and the risk of each loan is lower compared to Large and Medium Sector lending. The pace of lending to SMEs were accelerated by digitalisation of economy.

The factors including :concepts like Cash less economy, demonetisation, data mining, higher operating efficiency, adoption of new technologies, fintech revolution, Mudra Scheme, the telecom / internet / broad band penetration and the encouragement for new start ups have created new business models for delivering credit to MSMEs.

There are companies today delivering credit in 3 minutes of application for credit by using the latest technologies to disburse credit. In the year, 2017 – 2018, Mudra loans disbursed amounted to Rs 2,46,437 cr and in 2018 – 19, so far, the loans disbursed amounted to Rs 2,02,668 cr.

The total loans disbursed under this scheme stood at Rs 7.23 Lakh crore and more than 15.56 crore people benefited from this scheme. Apart from Mudra Loans, the concept of P2P, where person to person lending also took off and more than Rs 100 cr was disbursed through this system and the loans disbursed under P2P is likely to exceed more than Rs 25,000 cr in the next five years.

The acceleration of loans to MSMEs in the last four years was facilitated by a robust development of an eco system which was very conducive for disbursing more loans to the needy. The digitisation process has been adopted in Credit Assessment, Loan processing and Loan disbursement.

In the credit Analysis, the details of Aadhar card, Pan Card, their buying behaviour, data received from ecommerce web sites like Amazon, Flipkart, travel web sites are used to build a credit history. RBI has permitted a few Credit rating agencies to collect information from all the banks about all the borrowers and their credit history. The credit bureaus, calculate the credit scores based on the details given by banks. The credit history is available for Individuals as well as the corporates.

Today lenders are able to get this data online in a few seconds and this is one of the inputs to decide the credit worthiness of Individuals and corporates. Using their own models, they are able to decide the amount of credit which could be disbursed. All this is done, without much of human intervention and most of the processes are automated.

In the case of P2P lending, the lenders has evolved credit scoring models in their system. They connect both the lenders and borrowers and each put their own requirement. Lenders and borrowers are able to decide with whom the transaction to be executed based on the interest rate, duration and the amount of credit available.

In the last two years, India moved from a rank of 155 in data consumption in the world to No1 today. This was facilitated by fast growth of 4 G services and introduction of smart phones in the market. This has helped to deliver very small loans without much of processing and administration cost. Even credit card companies have started giving automatic credit limits to Individuals based on the credit history.

In the credit processing, the concepts like AI, Block Chain, Robotic Process Automation are being used which quickens the process of assessment and data is drawn from various sources and big data is being used, data mining techniques are being applied and the decision to give the credit is taken in minutes.

Jan Dhan, Aadhar and Mobile is making the process of digitisation in MSME lending easier. India has one of the most advanced digital infrastructure in the world today to deliver MSME credit and adoption of Digital technologies will increase the share of MSMEs in total credit, which will facilitate the GDP growth.

R Kannan is Head of Corporate Performance Monitoring and Research, Hinduja Group. Views are personal.

Growth Driven Budget

Growth Driven Budget

The budget has met the expectations of a most segments of the population.  Lots of sops for farmers,  Salaried and the workers in the unorgainsed sector. There is an increase in outlay for  Rural employment scheme to Rs.60,000 cr. Overall, the budget is likely to put more money in the hands of the common man. When more money is available, the people from Mid income and Low income tend to spend more and the growth of GDP from personal consumption will increase.

More than Rs.120,000 cr is likely to be put in the hands of the final customers on implementation of the budget proposals. The companies which are having a large presence in Rural areas and having business model based on consumption are likely to benefit in a big way.  Rs.20,000 cr for compensation to farmers has been budgeted in this fiscal and this money will be disbursed before March 19.

The budget is very good for stock markets and many companies will improve their financial  performance and  able to come up with good quarterly and annual results. The companies can focus on rural markets and increase their presence in rural markets.

Apart from giving a waiver of payment of income tax for those  who are earning Rs.5 Laks per annum, which will benefit more than 3 crore tax payers, there was no change in tax rates. The purchasing power of tax payers will rise and the exemption alone is going to put more than  Rs.25, 000 cr in the hands of tax payers, if additional benefits ,they will avail be taken into account.

The total receipts of the government is likely to rise to Rs.24.50 Lakh cr, a rise of 14.72% over the previous year. The projection for FY 20 is Rs.27.84 Lakh cr , a projected increase of 13.31% over the previous year. Tax revenue for the centre in FY 19 increased by 19.47% to Rs. 14.84 Lakh cr. In FY 20, it is projected rise to Rs.17.05 Lakh cr , a rise of 14.86%

Corporate tax will rise by 17.47% to Rs6.71 Lakh cr and in FY 20 , it is expected to rise by 13.26% to Rs.7.60 Lakh cr. Income tax collection will rise by 22.80% to Rs. 5.29 Lakh cr and the projection for FY 20 is Rs.6.20 Lakh cr,  growth of 17.2%. This is despite, 3 cr people who will stop paying taxes as per the tax waiver announced.

Since the trade growth was very tepid, the collections from customs is likely to rise by less than once per cent to Rs.1.30 Lakh cr in FY 19 but in FY 20, they are expecting a rise in revenue of  11.8% at Rs.1.45 Lakh cr. Excise duties are  likely to rise by only 0.07% to Rs. 2.59 Lakh cr in FY 19 and it is likely to remain at the same level as in FY 19.

There will be a shortfall in GST collection of Rs. 1 Lakh cr at Rs.6.43 Lakh crore in FY 19. It will rise to Rs.7.61 Lakh cr in Fy 20 , a rise of 18.22%.

In the year FY 18, dividends and taxes received by the Central government was at Rs.91,360 cr. In FY 19, they expect to collect Rs.1.19 Lakh cr, a sharp rise of 30.54% . In FY 20, the revenue from Dividends is projected to rise by 14% to Rs.1.36 Lakh cr. To achieve this target, there is a need to improve the performance of PSUs and there has to be a strategy to monetise the assets of PSUs in India.

Disinvestment receipts in FY 18 were at Rs.100,045 cr. In FY 19 , it is likely to be at Rs.80,000 cr and in FY 20, they are planning to divest Rs.80,000 cr.  They are showing an item of Strategic disinvestment of Rs.93,155 cr in FY 19 and the projection for FY 20 is Rs.102,507 cr.

Non tax revenue in FY 19 is likely to rise to Rs.2.45 Lakh cr, a rise of 27.2% over  FY 18. In FY 20, it is likely to rise to  Rs.2.72 L cr, a rise of 11.16%.  Capital receipts in FY 19 likely to be Rs.7.27 Lakh cr, a rise of only 2.94% over the previous year. But in FY 20, it is likely to rise to Rs.8.06 Lakh cr, a rise of Rs;10.85%. On capital receipts, the main source will be Borrowings. In FY 19 , borrowings are likely to be at Rs.6.24 Lakh cr, a rise of 7.33% over the previous year. In FY 20, it will rise to Rs.7.04 Lakh cr, a rise of Rs.10.97 %. The Fiscal deficit is projected at 3.4% for FY 19 and it is likely to remain at the same level  at 3.4%.  The budget deficit is likely to be mainly funded by borrowings. Government will be the largest borrower in the market in FY 20.

On the expenditure side,   Total revenue expenditure is likely to rise to Rs.21.40 Lakh cr, a rise of 13.93% and it is likely to rise by 14.36% to Rs.24.47 Lakh cr. Interest payments in FY 19 , on the total expenditure is likely to be at 23.9% and it is likely to be at 23.88% of the projected receipts.

Revenue deficit in Fy 19 is likely to be at Rs.4.10 Lakh cr. 2.2%. In budget , the  ratio is kept at the same level at 2.2% for Fy 20. Since  no new measures were announced for raising further taxes, most of the incremental expenses are likely to be met by other sources including Disinvestment, Strategic sale of assets and asset monetisation. It will be supported by borrowings by the government.

R.Kannan

Head – Corporate Performance Monitoring and Research

Hinduja Group

The Article  appeared in Free Press Journal on 2^nd Feb 2019

https://www.freepressjournal.in/business/budget-2019-exercise-in-driving-growth/1450212

My article which appeared in 31st Jan 2019 issue of Free Press Journal

Capital markets set to be growth catalyst for India

written by R Kannan January 31, 2019 9:19 am

By 2025, India will have one of the most sophisticated financial markets in the world, with the best practices and adoption of cutting edge technologies. Companies have to identify the right business model and funding model to capitalise on emerging opportunities, says R.Kannan

India has a very robust capital market and if the economic growth continues its momentum, by 2025 India could be among the top three capital markets in the world. India is growing at a rate of more than 7 per cent per annum now and going forward, for the next few years, Indian economy is likely to grow at a CAGR of 7 per cent. Many strategies and action plans are being discussed by various stakeholders on how to reach a Gross Domestic Product (GDP) of $5 trillion, as fast as possible. The robust growth in India is facilitated by various sources of funding. India is gradually moving from bank-based funding model to market-based funding model. In fact, in the last two years, markets have played a major role in meeting the funding requirements of corporates and the government. In the financial year 2018 (FY18), the funds raised from the capital market through equity and debt amounted to Rs 8.8 lakh crore, more than $100 billion.

India has one of the highest gross savings in the world. The savings of 30 per cent is mainly invested in physical assets in India and only a small portion of the savings is invested in capital markets. The level of financial intermediation in India is insignificant compared to other major markets in the world. The savings in the economy is about $750 billion a year and for infrastructure, India requires only $200 billion a year and including the capex in other sectors, the requirement of funds is lower than the overall savings. If a higher level of financial intermediation is achieved, this will result in meeting the funding requirements of Indian corporates and government through internal, domestic sources. Today, there was a reliance on foreign direct investment (FDI) and other investments by FIIs/FPIS from abroad to meet the funding requirements. A well-developed capital market will facilitate the channelising of funds smoothly to the required sectors.

Economies in the world can be classified into three categories in terms of how the funding needs in the economy are met. In the first category, many of the developed countries figure and the main sources of funding in the economy are capital markets. Even the charitable institutions and municipal bodies go to capital markets to meet their funding requirements. The second category of countries rely on both bank funding and capital markets to meet their fund requirements. In the third category, most of the funds required come from the banking system. India falls under the second category and the capital markets are in a take off stage and in future it is likely that the funds raised from capital markets will exceed the funds raised from banks. This trend is already visible in the Indian market. India is moving towards a higher level of financialisation.

The recent trends in digitalisation, demonetisation, financial inclusion, investor awareness, new financial products, introduction of GST and fintech revolution would accelerate the process of financial intermediation. The faster adoption of emerging technologies by customers including mobile transactions and digital transactions will help in introduction of many new financial products. The other trends which will accelerate the growth of capital market include: Opening of bond markets to retail segment, introduction of Real estate investment trusts (REITs) and infrastructure investment trusts (InvITs), securitisation, rising incomes, adoption of financial products in rural areas, cross sale of financial products, increasing popularity of wealth management and development of commodities trading market.

In any economy, where the per capita GDP is above $1500, the financial services sector grows at double the rate of the GDP growth. Assuming that, our economy will grow at a CAGR of 7 per cent in the coming years and reach a level of $4 trillion by 2025. The savings in a year will rise to $1.2 trillion. The capital markets will see a growth of 14 per cent CAGR. The resources raised from capital markets in a year will rise from $120 billion in 2018 to $300 billion in 2025. Mutual funds have become very popular in India and in the last few years and the industry size was at $331 billion at the end of March 18. At a growth of 15 per cent CAGR, the size of assets managed by mutual funds will rise to $880 billion by March 2025. The concept of systematic investment plans (SIPs) and the government outsourcing the management of corpus of the pension and other organisations also will a give a fillip to the mutual fund industry.

IPOs & secondary markets

India has the largest number of listed companies in the world and the average amount raised in Initial public offerings (IPOs) by a company has multiplied several times. Further, the stock exchanges also had opened windows for companies from SME sector to get listed and separate platform for trading of the stocks. There is a continuous introduction of new products and processes in the market, which will make the financial intermediation take off in a big way.

Life insurance

The penetration of insurance in India is very low and at the end of March 2017, the sector had a premium of $64.64 billion. The CAGR in the past was around 13 per cent. Assuming the same trend will continue, the size of this sector will rise to $170 billion annual premium. The share of private sector and new products in the overall pie will increase.

Non-life insurance

The size of the industry at the end of March was at $19.71 billion (premium). The industry is likely to grow at a CAGR of 14 per cent per annum. The premium by March 2025 is likely to rise to $56 billion a year. The insurance industry is likely to have assets under management of more than $1 trillion by 2025. Only insurance and pension industries have long term funds, which can be deployed in Iong-gestation infrastructure projects without any asset liability mismatch.

Pension funds

The funds under the management at the end of October 2018 was at Rs 2.63 lakh crore. This industry is likely to grow at more than 20 per cent per annum. The industry can provide long term funds for the Infrastructure sector. By 2025, the industry size is likely to be at Rs 10,00,000 crore.

Private equity & venture funds

In India, the concept of alternate assets has taken off. Various types of funds focussing on different aspects of the economy have emerged. Various new initiatives by the new government has given a big fillip to start up movement in India and at the end of 2017, the PE investments in India were valued at $26.45 billion and they grew at a CAGR of 28 per cent in the last five years and assuming that, they will grow at 20 per cent CAGR in the coming years, the industry will grow to $110 billion.

NBFCs

In the last few years, Non-banking financial companies (NBFCs) were growing at 18 per cent+ per annum and they had gained market share from bank funding. Especially, in realty funding, NBFCs increased their share substantially. But most of their funding was coming from banks and mutual funds. NBFCs mobilised short term funds and deployed in long term assets. This has resulted in a mismatch of asset liability. Their under writing losses also increased. Due to recent fiasco in the NBFC sector, these companies are in the process of realigning the business model and funding model. Despite the setback, this sector is likely to grow at a CAGR of 15 per cent in the coming years. Their share in total outstanding credit in India stands at 18 per cent and this is likely to rise to 25 per cent by 2025. The recent developments in the banking, financial services and insurance (BFSI) sector including the issues relating to NBFC sector and emerging vigilant regulation will force the marginal players to exit the business. There will be a consolidation from mergers and acquisitions. The companies with good underwriting skills, robust asset and liability management (ALM) and diligent risk management system will take over the weaker ones leading to consolidation of the industry.

To become the third-largest capital markets in the world, some of the action plans which could be taken by the authorities and stakeholders could include: Create enabling legislation for the faster growth of the markets. Stable policies. Assuring a certainty of implementation of policy/rule for at least five years. Improve the ease of doing business in these sectors. Allowing the introduction of new financial products available in other parts of the world. Introduce many new products where, the main target segment will be retail customers.Create an integrated and unified approach to regulation of all the business segments in capital market. Create incentives for investment in long dated instruments. Move towards a single KYC concept in the financial services sector. Create a centralised data base, where the data from all the regulators are aggregated, stored and used for formulating future policies. Develop a robust system for security of data and use of data for authorised purposes.

Use the electronic media to create an awareness among most of the population on the financial products. By 2025, India will have one of the most sophisticated financial markets in the world, with the best practices and adoption of the cutting edge technologies. Customers will have wider choice of financial products to choose from. The technology will bring challenges including cyber security and by 2025, the adoption cyber security solutions will have attained a maturity. India will become one of the most attractive markets for investment and our market capitalisation is likely to be in the top three in the world. Banks and financial services companies constitute a significant portion of the market indices in India today and in the total market capitalisation of the country. Considering the high growth of the capital markets, the preference for BFSI stocks will rise further and their share in overall market capitalisation will rise. The capital markets will play a major role in the years to come. In future, there will be a thrust on innovation in products, processes and distribution channels which will increase the share of capital markets in financial transactions in the economy. In conclusion, the future of capital markets in India is good and will grow at a healthy growth. The capital market offers opportunities for stakeholders including companies, banks, NPFCs, insurance companies, wealth managers, pension funds, private equity and venture capital and brokers. The higher level of financial intermediation and faster adoption of fintech technology will ensure a higher growth of capital markets. Companies have to identify the right business model and funding model to capitalise the emerging opportunities and participate in the growth of capital markets.

The author is Head Corporate Performance Monitoring and Research, Hinduja Group

https://www.freepressjournal.in/business/capital-markets-set-to-be-growth-catalyst-for-india/1448605

Brexit Concerns - The way forward

The Article appeared in Free Press Jouranl

Brexit concerns: The way forward

written by R Kannan January 3, 2019 8:33 am

When the Brexit referendum was put to vote in UK, the general expectation was that it would remain in the EU. In the June 23, 2016 referendum, 17.4 million voters, 52 per cent, backed Brexit ,while 16.1 million, 48 per cent, backed staying in the union. The difference was only 4% of voters, 1.3 million. Since the time available for Brexit was 21 months from the date of referendum, the UK government was hopeful that before the period gets over, they would be able to strike a deal for post Brexit scenario with EU and other members countries and the Brexit process would be smooth, less painful and could be achieved in a least effort with least cost. After the result of referendum was out, it created ripples in UK. Looking at the thin margin, many felt that , Brexit would be bad for the UK Economy. There were also talks that second referendum should be conducted, since the margin was thin and for a event which would have significant impact for all the stakeholders, it was better to reconfirm the mood of people again before going ahead with such a big economic reform. By end of December 2018, the post Brexit deal is yet to be reached. This has created a lot of uncertainty in the minds of all the stakeholders and will have significant short term impact on the UK economy. Closer to the implementation date, it emerges that there are many issues relating to immigration, trade barriers, cost of doing business, logistics, hospitality, business competitiveness and the need to add many new departments and functions in various government departments with huge financial outlays. Further, it has created a turbulence in terms of future of businesses, employees and the economic growth. Brexit decision is a unilateral decision.

The ECJ, in its recent statement, opined that since UK decided to exit EU on its own, till the post Brexit agreements are in place and the date of Brexit arrives, UK still has the discretion to withdraw from Brexit. Of course, UK has to go through the governance procedures, indicating that it could go through the process of parliamentary vote or any other procedure including a new referendum which would allow UK to withdraw from its proposal to exit EU. As the dead line nears, the expert predictions also indicate that the Probability of UK remaining in the EU has increased. There is an increased concern and wish that UK withdraws from the process of Brexit. Considering the fact that UKs trade with Europe amounts to 49% of its total trade, Brexit is likely to increase the cost of trade in terms of additional procedures, transport delays, additional levies and reducing the ease of doing business. Today many countries are focussing on liberalising the trade and set a goal to move towards higher rank in ease of doing business.

In 2009, the ease of doing business rank of UK was at 5 and it slided to 9 by the year 2018. If Brexit is brought in effect, UKs rank is likely to slide down further. Brexit will increase the trade barriers. To reduce the impact of the barriers, the efforts should be to remove tariffs and eliminate non-tariff barriers to trade. The assumption behind Brexit is that this would happen, which will not be true when it comes to the implementation. When various expert studies predicted the loss of economic output, one of the main reasons highlighted in those studies was the presence of new trade barriers.

Brexit will reduce FDI. Of the total FDI in UK, in Jan 2018, 42.6% of the investments were from EU and from the companies which have strong ties with the UK. After the Brexit, the cross border trade will reduce, thereby reducing the attractiveness of investments by EU companies in UK. Brexit will have impact on availability of skilled employees. As of now, there are one million Britons living in EU and 3.5 million citizens living in UK. EU has made a provision for UK nationals to remain in EU and have introduced a scheme for them to stay in EU. But it is unclear what will happen to 3.5 million from EU who are living in UK. Even UK nationals have started registering for citizenship in other countries to avoid the uncertainty. After the Brexit, it is not clear how the dynamics will work out. If EU citizens leave the country, it will create a big gap in skills required. This will also impact the productivity of the economy. The relationship of UK with other EU countries will undergo a big change.

At the same time, UK will have opportunities to consider other partners to expand its trade, especially from Asia, the countries like; India, China, Malaysia, Vietnam, and Thailand. The predictions by various experts on the post Brexit Scenario, project that there could be an economic output gain of 7% to Economic output loss of 18%. Reduce the ease of doing business and reinstating the barriers to trade is bound to reduce the economic output for both UK and EU. According to various experts, to assess , whether the Brexit is good or bad, there is a need to make the assumptions made for going for the Brexit vote transparent to every one.

While putting to vote, the action plans identified for how the migration would be handled has to be discussed in detail. The post Brexit predictions by UK government includes, the incremental growth , which will accrue to the UK economy through non – Brexit policy related actions. While looking at the post Brexit scenario, the effect of non Brexit policy related actions on economic growth should be separated, so as to understand the real effect of Brexit on the future of UK economic growth. In this world of VUCA, Brexit can have a negative effect on the UK and European economies. Whereas the scope for achieving a very high economic growth through Brexit is very limited. Further, most of the European economies are growing at the rate of 1 to 2 % and introducing a new uncertainty will debilitate Europe when there are other factors like trade wars and withdrawal of Stimulus by US and Europe.

In the light of this, the following options could be looked at in resolving this issue. The government can take measures including , putting the proposal to vote in the parliament, conducting a second referendum or adopt any other procedure as per the UK legislation, which allows the withdrawal of the proposal to made to EU. This will help to maintain the status quo, removing all the uncertainties for both UK and the EU. Till now, no deal has been arrived at and there is an immediate need to decide on the way forward from March 2019. To reduce the impact of no deal, which is likely to be very costly for the UK economy, in the event of deciding to proceed with Brexit,the following options could be looked at. Send a proposal to EU to extend the time period of Brexit by another six months to one year, go with the Brexit and allow the present arrangements to continue for six months to one year, enter into agreements with each individual member country of EU, where the agreement is similar to, mirror image of the one signed by UK to be part of the EU. By considering the above options, UK should be able to come out of the short term uncertainty and will have time to look at all the options which will ensure the continued competitiveness of UK economy and its long-term stable future.

https://www.freepressjournal.in/analysis/brexit-concerns-the-way-forward/1428351

R Kanan is the Head of Corporate Performance Monitoring and Research, Hinduja Group. (Views are personal).

Trade Wars could be a boon for India

Trade Wars could be a boon for India

written by R Kannan December 15, 2018 08:22 AM

The Article appeared in the Free Press Journal Mumbai

The trade war between US and China has created  a turbulence in the global affairs  and  the  trade between nations will undergo a change if the issues between two nations are not resolved soon. In the month of November, US had the highest trade deficit with China. The two countries so far imposed tariffs on $ 360 bn of merchandise trade between them.

US-China trade war will have an adverse effect on many economies which are depending on trade and it will distort the trade flows between countries. The war is likely to push the production to more expensive locations which will lead to price rise and reduced efficiency. Global trade growth  will take a beating, existing global supply chains will be disrupted and investor confidence will dampen. There are two opposite views on What US will do once  the year 2019 dawns. It will go ahead with the proposals and start implementing them. Other view is that, once we come closer to 2019, US could change its stand and moderate the proposals.

While, many countries will be affected by the Global trade war, few countries, will also be winners in this scenario. US and China will explore options for suppliers from other countries to fulfil their demand. They will develop alternate markets for their products and seek new sources to meet their local demand.

The countries which are likely to benefit include, Mexico (auto exports to US will increase), Europe (can export more agricultural produce to China) and many of the Asian countries , especially ,India, Malaysia, Vietnam, Indonesia, Thailand, Sri Lanka, Pakistan, Cambodia, Myanmar can explore the opportunities to increase their exports.

India can focus on increasing the exports from ICT, Automotive, Apparel and Readymade sectors. ICT is one sector, where US government has increased the tariff for imports from China. This is the largest category of imports from China and it amounted to $ 150 bn a year. This will help to hamper the China initiative of Made in China 2025 , which is focussed on increasing the growth of the hi tech sectors in China. India witnessed a phenomenal growth in mobile penetration and other related ICT sectors in the last few years. India had come out with a policy of Hardware manufacturing and few large players, especially in mobile phones had announced their plans for big investment in this sector. India has a very good eco system for hardware development and this could be a good opportunity for India to increase the growth of hardware Industry. The initiatives in India like Make in India, Industry 4.0, will make India attractive for foreign companies to make the investments here.

Automotives. China exported finished vehicles of US $ 7.2 bn. But exports of Auto components from China was at $ 31 bn in 2017. US was the main destination for Auto component exports from China.  This is likely to affect the Chinese exporters. China Imported Finished  Vehicle exports to the tune of US $ 10.3 bn. But most of the brands exported to China, have their local presence in China. Auto components is a very big opportunity. In the last few years, India has become very competitive in Auto sector and emerged as the most preferred location for manufacturing small cars in the world. Further, the Eco system for Auto sector in India is well developed. All the players in the market invest on innovation , R&D and produce global quality vehicles today. Further, the FDI regulations for this sector are very liberal. Indian Auto and Auto component manufacturers can capitalise on this emerging opportunity.

Apparel and readymade Garments. China is the leading producer today and they exported $ 38.7 bn to US in 2017. In 2016, China  had 36.2% of global textile exports and 34.5% of global clothing exports.  The new tariffs by US government , will create significant opportunities for other countries who are leading exporters in the world.  Bangladesh and Vietnam rank second and third in world in exports. But India has the raw material , cotton and  a vibrant Industry. At present, high quality yarns from other countries are not allowed to be imported into India. If India relaxes , this norm, India can move higher up in the value chain and aspire to become the second largest exporter in the world.

India can fill the void of exports from US to China. This will be mainly in the area of agriculture and we can grow crops which are suited to Chinas’ requirements and ensure China continues to buy cotton from us  and start importing other agricultural produce. This will also help in achieving the objective of doubling farmers income and increasing the productivity in agriculture. India has a very huge trade deficit with China. By promoting Agri Exports, the trade deficit with China could be reduced.

By focussing on these sectors, India would be able to significantly increase its exports and it will also aid in  achieving the export targets set by the Government and reduce the trade deficit. The more investment friendly / export friendly policies could be drawn up in these sectors , keeping the export markets as the focus. This is the right time for India to accelerate the development of these sectors.

R Kannan is Head, Corporate Performance Management, Hinduja Group. The views are personal.

Currency Wars

Currency wars – Will spoil the Party

A country’s Currency strength determines its competitiveness in the global trade. Strength of a currency in determined by Fiscal deficit, Trade deficit, Forex reserves and capital flows in an economy.

The economies where the foreign reserves are very high,  trade surplus is there and positive  capital inflows in the economy, currencies have a tendency to appreciate. The countries where there is high trade deficit, negative capital flows, negative current account are likely to witness depreciation in currency. Depending on the situation, countries resort to manipulation of currency by either buying or selling dollars. Buying dollars lead to appreciation of currency and selling dollars lead to depreciation of currency. Extent of buying , Selling determines the level of appreciation / depreciation.

Currencies which are weak, provides the cost competitive advantage to nations in gaining share in global trade. China gained lot of advantage in the global trade by keeping its currency weak for long, supported by artificial depression of Cost of production in the country. This helped China to become the leader in manufacturing in the world. After the pressures from US and others, China allowed the appreciation of currency .

The advent of Trade war now is posing a big challenge to nations across the world. Trade war will lead to slow growth in global trade and many of the nations which mainly depend on trade will be affected in a big way. To counter the trade war, Countries will adopt  the strategy of weakening their  currency.

This year, China’s remnibi already weakened. After a fall in 2016,  renminbi witnessed appreciation  in the second half of 2017. It lost momentum in early 2018 due to slowing economic growth and the escalating trade dispute with the US. The renminbi depreciated by 3.2% against the US currency in June alone, its worst-ever monthly performance. This will lead to exchange-rate volatility . China will continue to allow the depreciation of its currency if the trade wars continue.

A similar trend was witnessed by many of the emerging economies where they saw their currency depreciating against the dollar. Currency depreciation leads to inflation since the imported commodities cost more. If trade wars continue, even, other large exporting countries will start depreciating their currency. This will lead to currency wars.

When the countries want their currency to remain stable to ensure a stable economy, they resort to  buying dollars, which results in appreciation of currencies. This will help in making the 

economy stable and helps importers .

When countries want to increase the competitiveness of products, central banks sell dollars in large quantities, which leads to depreciation of the local currency. When a commodity exporter, a manufactured product exporter or a service exporter , benefit from this move, Since their sales is dollars or equivalent and when the proceeds are realised in India, they will be able to make good profit. 

Since April the US dollar has rallied and market expects Fed will accelerate the pace of monetary tightening and expects US interest rates to go up ,which will make reverse flow of capital from the Emerging economies.

In line with the emerging trends, Indian currency also witnessed a fall . Rupee depreciated by 7%  from Rs 64.50 to a dollar on June 23 to Rs 69.05 on 24 July, a very sharp depreciation. India has a huge current account deficit and fiscal deficit. Indian Economic growth was supported by capital inflows in the last few years , when the interest rates in global markets and US were very low. Now that US has started increasing the interest rates, some of the capital which flowed to Indian Economy will go back. This will put a pressure on rupee.

 Many experts believe that Indian Rupee will not depreciate beyond Rs.70, since RBI intervenes at regular intervals to keep the rupee stable, which will ensure the stability of the overall economy. There are predictions that it could touch Rs.72 also if oil prices rise further and our trade deficit continues to  show a rising trend.

If the trade wars continue, it will be a challenge for India to keep the export competitiveness high . Allowing rupee to depreciate , will lead to inflation. In the last three , four years, inflation was contained. Now that we are in the election year, the currency has to be kept stable. It will be a challenge for Policy makers in the area of currency management and Trade management. We have to be ready with solutions for each possible scenario , so that inflation is contained, our economic stability is maintained, our exports are competitive.