Through the Looking Glass

India may end up implicitly choosing a stance of preferring capital flows over current account flows, if it sets a GDP target in a foreign currency Financial Express A currency serves two purposes: medium of exchange and store of value. We have explored this idea in these pages in a different context earlier when we looked at the relationship between legacy finance firms and fintech companies. Today, we explore the implication of this definition and purpose of a currency in the context of a country’s financial relationships with other countries. For a country, its relationship with the world flows through two accounts: capital account and current account. For sake of simplicity, capital account refers to all the monies transferred on account of buying or selling of assets like equity, debt, property, etc, and current account includes all the trade in goods and services including investment incomes and remittances. It can readily be seen that when a country engages with the world...

As the Centre and States try to find GST compensation cess monies, it is time to look beyond the present, to see how the future could unfold for State finances Financial Express The financial relationship between states and the Centre has been in news recently. The Fifteenth Finance Commission submitted its report to the president; there have been some delays in payment of the GST compensation cess, and there were some discussions on whether the Centre will honour its commitment of assuring a 14% revenue growth in the agreed-upon transition period. Constitutionally, Centre-State fiscal relations come up for review quinquennially (once every five years). States have ceded significant taxing powers to the Centre via GST. Earlier, the states had their own tax bases and could manage revenues by juggling taxation policies. This led to a large number of state-specific tax rates, a lack of uniformity in the tax structure in the country, and sometimes, a race to very low-tax regimes to...

The evolution of India’s tax-to-GDP ratio will require significant political and social consensus—a strategic modelling and planning of tax POLICIES is required Financial Express India’s tax-to-GDP ratio at the government level has hovered around 18-19% of GDP over the last few years (between FY17 and FY20E). Coupled with disinvestments, dividends, and other receipts, the central government mops up another 5-6% of GDP, taking the total revenues of the government to about a quarter of GDP. The government is committed to spend, on account of both revenue and capital expenditure, 29-30% of the country’s GDP, leaving it with a fiscal deficit in the 4-6% range. The revenue percentages for the government have remained reasonably sticky, and the expenditure items are also committed. As India works its way towards a $5 trillion economy, or double its current size, in the next few years, it is worth considering what the fiscal landscape could look like. As Esteban Ortiz-Ospina and Max R...

Financial Express The product design strategy of a financial service firm revolves around ‘maturity transformation’, ‘liquidity transformation’ or ‘risk transformation’. There is excitement about fintech eating traditional finance. The incumbents are institutions with legacy systems and older-generation leadership while the new-age challengers are building models on open APIs and have modular, scalable platforms. In the new world, customer engagement is expected to hold the audience captive—this is expected to create a strong distribution pipeline via which products of increasing complexity can be sold. A publication by the Boston Consulting Group earlier this July, “Banks Brace for a New Wave of Digital Disruption” talks about the need for the banks “to redefine themselves and change how they operate”. However, it adds an important caveat: “given the fundamental strength of many leading multinational banks, banking’s inherently high barriers to entry, and the extent of the indu...

Financial Express A house is not merely a place to live and build a life, it is also one of the most significant assets of the family. An investment in a house roots a family to a location, giving them a significant stake in the development of the local area. Housing is a fundamental requirement of human existence. The requirement of shelter is so basic that in common parlance in India, it is clubbed together with food and clothing as the troika of basic human needs of roti, kapda, and makaan. It is no wonder that housing is a key social demand, and a priority area for governments, both at the Centre and the states. Housing as a socio-economic construct The development of housing is a function of the economic reality of a location and its era. India has seen, and will continue to see, significant urbanisation. Where people choose to live is a complex optimisation of how close houses are to their places of economic activity (work, business catchment area, etc), how conveniently...

Financial Express This requires confidence, coordination and capital; resolution can't be imposed using policy actions When commemorating anniversaries, we tend to reserve our special attention for round-number, decadal years. Last year, around this time, the world—and India—remembered and recounted its lessons from the Great Financial Crisis (GFC) that reverberated across the globe in September 2008. Since it is the nature of history to repeat, but not to rhyme, decadal recounting of experiences and learnings serve as good markers, but may not be timed to perfection. The challenges in the local banking and non-banking finance companies 11 years post the GFC require us to take a relook at the learnings, especially, on the aspects that eventually led to the calming of the markets. India is nowhere near the situation that the world witnessed 11 years ago—however, GFC offers helpful pointers on how to navigate the sometimes choppy waters. The business of finance is built on t...

Financial Express The onus falls on business to continue to engender society’s and regulators’ trust in the usefulness of technology. New technologies bring with them challenges of regulation. The key challenges facing regulators in the context of drones are privacy, safety and security. Drones have captured headlines this week. The spectacular drone attack on Saudi Arabian oil facilities knocked out ~5% of daily oil supply. The Maharashtra government announced that it signed up with a global private firm to “use a logistics network of autonomous delivery drones to help transform emergency medicine and critical care”. The Economist, on its latest cover, highlighted that ‘flying taxis take off’ even as earlier this year, the Gatwick airport closed for a day and a half over “drone sighting”. Drones, or unmanned aerial vehicles (UAVs) or remotely piloted aircraft systems (RPAS), have become common in a wide variety of more beneficial, mundane and practical applications in agricultu...