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Manufacturing’s Missing Might: India’s Growth Puzzle

Manufacturing’s crucial role in economic prosperity, highlighted by Prof. Kaldor’s research, prompted India to launch multiple initiatives like the National Manufacturing Policy 2011, Make in India and PLI Schemes. However, the sector’s performance remains weak, with manufacturing IIP growing at just 3.1 per cent CAGR (FY 2012–24) and 1.9 per cent (FY 2019–24), well below policy targets of 12–14 per cent. The sector’s GDP share has declined from 16 per cent to 13–14 per cent since the mid-2000s, challenging India’s vision of becoming a high-income nation by 2047 (Viksit Bharat). This underperformance persists despite favourable demographics, strong infrastructure spending, and healthy corporate balance sheets.

THE STRUCTURAL SHIFT: FROM PRODUCTION TO FINANCIALISATION

Manufacturing’s sluggish performance is commonly attributed to ill-defined external factors and reform gaps — a tenuous explanation without rigorous analytics. In contrast, the real reasoning emerges from an analysis of RBI’s comprehensive database, spanning over 2.33 lakh company-years across six decades, which reveals two key trends: Corporates’ declining productive investment and increasing financialisation since the mid-2000s [See Table]. Public Limited Companies (PLCs) experienced a significant shift in asset allocation between 1961 and 2023. The average share of Gross Fixed Assets (GFA) in total assets declined steadily from 70 per cent in the pre-liberalisation period [1961–90] to 55 per cent in recent years [2011–23], while the share of the financial investments surged from 3 per cent to 21 per cent. This trend suggests a notable shift from physical assets to financial ones. Private Limited Companies [Pvt LCs] followed a similar pattern, albeit at a moderate pace. The coincidence of import liberalisation, China’s entry into the WTO in the early 2000s and the subsequent accelerated growth in its exports to India are not merely coincidental. Further, corporates’ liquidity balances in terms of cash, cash equivalents and bank balances show a higher share during the last two decades compared to the first four decades, despite exponential growth in digital payments. The real factors behind these two shifts remain unaddressed and un-analysed.

Table: Non-Govt. Non-Financial Public & Pvt. Ltd Companies’ Financial Ratios as per cent of Total Assets

Sources: RBI: Compendium on Private Corporate Business Sector in India FY1951–2009 and DBIE Database

UNDERSTANDING THE INVESTMENT SLOWDOWN

Despite the increasing need for capital investment in advanced machinery and technology to enhance productivity and value addition in the manufacturing sector, corporate capital deepening has lagged behind expectations. This decline stems significantly from the opaque pricing of mis-invoiced and covert Chinese imports, creating severe uncertainties in cost structures and investment returns that ultimately jeopardise the viability of new manufacturing projects. As a consequence, it fosters assembly-focused operations and reliance on Chinese critical inputs, hindering capital deepening and the associated gains in total factor productivity growth. The corollary fall-out of under-investment in manufacturing is poor skill development and technological progress, and reduced productivity and competitiveness. This contrasts with India’s IT sector, where hands-on experience has driven skill development and success.

These issues are covered in the 145th Parliamentary Standing Committee Report (2018), the Directorate of Revenue Intelligence report (2015), the Global Financial Integrity Report (2019), George Herbert’s Research (2020), and Jha and Truong’s Analysis (2014). Research by Rhodium Group highlights that China can compel its companies to collude, fix prices and manipulate market dynamics to favour its export. No other country’s trade practices receive as frequent media coverage as those of China and its firms for their alleged tax evasion, hawala transactions, under-invoicing, breach of intellectual property rights, dumping, and transhipment. Harvard Prof. Graham Allison described China as the “most protectionist, mercantilist, and predatory major economy in the world.” China’s exploitation of WTO benefits while maintaining non-market practices, its predatory pricing, currency manipulation, various export subsidies, and export of counterfeits have triggered global anger and defensive responses. Some attribute China’s large export subsidies to contributing to China’s large public debt.

The massive gap between official trade data — shown by 19.5 per cent CAGR of Chinese imports [USD] over FY 2002–24 dwarfing India’s 2.6 per cent export CAGR to China coupled with huge volumes of unaccounted covert and mis-invoiced imports, illustrate the scale of predatory trade practices described above and sluggish manufacturing growth and employment. In addition to stifling manufacturing growth and capex, it led to NPA accumulation in the 2010s; drained savings, and hindered both job creation and on-the-job skill development.

Anecdotally, the severe impact of Chinese steel dumping on India’s steel industry is well-documented, with press headlines emphasising its consequences. In contrast, the full extent of the damage to many other industries caused by mis-invoiced and illicit Chinese imports remains largely unarticulated and unexplored.

When corporates face limited opportunities for productive capital investment, they tend to divert funds towards financial assets. The share of financial investment in total assets increased by 2.5 times and 2 times for PLCs and Pvt. LCs, respectively, since the 2000s. (See Table) Anecdotally, RBI’s Financial Stability Report (June 2014) highlighted a striking case of corporate over-financialisation- in FY 2013, the financial income of the top 10 corporates exceeded the treasury income of the top 10 banks.

TRADE CREDIT: DRIVING MANUFACTURING GROWTH FOR VIKSIT BHARAT 2047

A dysfunctional trade credit repayment ecosystem, coupled with massive illicit and mis-invoiced Chinese imports, is severely impacting India’s manufacturing sector. Trade credit, a vital enabler of cash flow, production, and operational continuity, is increasingly hindered by delayed payments and external pressures, stifling its role in driving economic growth. India can address these challenges by learning from successful digital lending models in China and Vietnam, where streamlined trade credit systems process millions of SME loans daily and have significantly strengthened their manufacturing bases. Integrating trade credit platforms with GSTN for real-time monitoring and enforcing payment discipline can create a robust B2B credit ecosystem. This approach can mitigate risks, enhance competitiveness, and position Indian manufacturers more effectively in global value chains.

The impact of this dysfunctional ecosystem is particularly evident in corporate liquidity patterns. Despite the exponential growth in digital payments, companies, especially smaller ones, are forced to maintain higher transactional liquidity levels than in the 1980s and 1990s due to uncertain receivables realisation and inconsistent trade credit availability, further straining their operational efficiency.

NAVIGATING THE PATH FORWARD

Addressing the structural challenges of India’s manufacturing sector requires a two-pronged approach. First, implementing rigorous, frequent, and surprise inspections at ports and airports to combat unscrupulous imports and dumping is crucial. Digital tracking systems should complement this administratively feasible and WTO-compatible strategy, enhanced quality testing infrastructure, and expedited anti-dumping investigations. Second, strengthening India’s trade credit payment ecosystem by learning from successful international models where streamlined trade credit payment discipline and invoice discounting systems have empowered SMEs to overcome financial constraints, boost exports, and improve their position in global value chains through enhanced innovation and productivity. This comprehensive approach can revitalise India’s manufacturing sector, fostering increased capital investment, technological advancement, and sustainable growth.

AI, PI, and CHAI

Editor’s Note:

We all have some latent desire or passion in life, but we do not pursue it for fear of failure or a busy schedule. Years pass by in busy professional work and when we have time, we are short of energy and zeal to learn new things. Here is an inspiring story of our own professional brother pursuing his passion as he steps into his golden years

 

My 60-year-old heart has a very important life lesson to share – there are three romances that a person must necessarily enjoy in life. I am talking of the necessary romances; others are optional!

What are these three romances? The first romance starts when you start your career when you work for money. This romance is called Active Income (Ai). The second romance is when you realise that you must make money work for you. This romance is called Passive Income (Pi). Most of us are so satisfied with Ai and Pi, that we never experience the third romance. This romance is very elusive, as many of us are not even aware of its existence. The third romance is called Chai – Creating Happiness Abundance & Impact.

I am fortunate to be blessed with a team that manages my CA practice, and I get to work on select assignments. This has created a lot of time and space for trying something new in the golden years of my life to experience Chai.

We are a family of chartered accountants; both my sons are also qualified. There was always a surplus of left-brain thinking at home. Fortunately, both daughters-in-law are predominantly right-brained. This created a good balance at home, with the Home Minister overseeing everything!

In 2020, during lockdown, I was initiated into meditation. During my meditation sessions, I started visualising images of beautiful paintings. There was not much to do in that period when the world had come to a standstill. I started watching videos on YouTube of various artists deeply involved in their art. That sowed the seed in my mind to try my hand at painting. However, the doubting voice in my head was constantly warning me about the risk of failure. It said, “You are a successful professional. How would you feel if you tried your hand at art and you failed?” That fear held me back. In the meantime, the visualisation during the meditation sessions just went on increasing.

My elder son and daughter-in-law had migrated to Canada in 2019. My elder daughter-in-law, a qualified artist, kept persuading me to try my hand at painting. However, my fear was too strong. Then, in 2022, my younger daughter-in-law, a marketing professional, started painting at home as a hobby. That was a God-sent opportunity to witness art being created in front of my eyes. One day, she asked me to try my hand at a painting. I applied a few strokes of oil paint on the canvas, and I started enjoying the process. However, my journey took a pause here. I needed a master by my side if I had to progress. Destiny had different plans. A dear friend once visited my office and saw the painting. I was facing some challenges in my personal life, and I was speaking to my friend about the same to get his suggestions. He urged me to start painting and bring out the energy that was suppressed inside me. He wanted me to express myself through art. Coincidently, we had just renovated our office, and I wanted a series of 7 paintings in a rainbow theme for the office. My friend immediately called my daughter-in-law and suggested to her that she must help me to express myself. This was the serendipitous moment that finally gave me the courage to take the plunge.

We have an art shop just down the lane where I live. I wasted no time in going there and buying all the supplies in one go. One fine evening, on returning from office, the shubh muhurat happened. With a few helpful tips from my daughter-in-law, I finally started painting on my own. My better half appreciated my efforts as she witnessed me giving birth to my first work of art. That was also the tonic that I needed. Everyone felt that it was a very decent effort, being my first work. After that, there was no looking back. I completed 5 paintings over the weekend! Next week, I completed my mission of 7 paintings. I churned out 9 paintings in 2 weeks. The 2 additional paintings were wide balls – they were good creations, but they did not match with the desired rainbow theme.

I experienced something very special in my tryst with art, and I would love to share the feelings as these are such valuable life lessons. I hope this will be helpful to all. Here I go:

  •  It is very important to have some source of Chai in your life. Each one of us will find Chai in different avenues. However, we must give it priority. Don’t be satisfied with just Ai and Pi.
  •  I started very hesitatingly; the fear inside me was still trying to stop me. However, the motivation and the encouragement helped me find my flow. Surround yourself with people who can encourage you.
  •  Once I found my flow, I practiced a lot, and within 10 days, I could see a substantial improvement in my skills. If you don’t try, you will never find out. Better have the regret of doing something rather than having the regret of not doing something.
  •  We all have some latent potential that we fail to nurture. We must give it a chance. Formal training is good, but not essential. You can learn by watching others in action and also on YouTube, etc.
  •  Being successful in one field sometimes creates barriers for us to try our hand at other things in life. We want to start at the same level of expertise in the new field. That fear of failure and criticism stops one from even trying.
  •  I realised that painting is deeply therapeutic. You are in a state of flow. You are just not there. When you are not there, then there is God! My elder daughter-in-law has qualified as an Art Therapist. I got an opportunity to experience the therapeutic qualities of art firsthand.
  •  While creating any work of art, you cannot plan everything. You have to act in the moment. Suddenly, you see some magical situation developing, and you do something totally different from what you had originally planned. Mindfulness is very important.
  •  I realised that one cannot make certain things happen. One needs to let go and accept the results as they unfold. Many things can happen without your intent.
  •  Art is not about achieving perfection. In fact, imperfections add to the beauty of a work of art. I learned to accept imperfections.
  •  Sometimes, a few things can happen effortlessly. At times, it becomes very challenging. You must persevere to get the right results.
  •  Learning is such a beautiful feeling. You learn from your mistakes. You learn from your achievements. I learned many things about life while pursuing my passion. When you keep learning, your brain is in a different state. Learning is a good anti-aging therapy.
  •  The painting possesses your mind until it is complete. It is a true passion. There might be no obvious purpose for these endeavors. However, they add life to your years! I have progressed from an emotional state to a philosophical state to a very spiritual state, where painting is like meditation for me. It connects me to my soul.

I wish and pray that everyone reading this article will be motivated to follow some passion that will nurture their soul and allow them to express themselves.

Today, give it a try — at least start with a cutting Chai. Majja aayega!

Chatting Up About India: When a $10 Trillion Economy Won’t Make a Difference

“India assimilated the worst stupidities of the democratic system.” – Charlie Munger

It is August, the month of our Independence Day — a time to look at the state of the nation, or for me, its different facets. One of the ways to look at things — to develop a perspective on things — is by questioning all the information we have and challenging the axioms we are programmed with. Looking at the stage we are in as a country, I wonder whether the time has come to MODIFY the phrase “ask not what your country can do for you, ask what you can do for your country”, especially in the context of taxpayers and honest citizens. For one, those words by JFK seem like a “perpetual one-sided idea” and therefore, not sustainable. It could be used as an excuse by politicians when their performance falls short compared to expectation and responsibility. I feel as taxpayers, we need to ask: “We do what we should do for our country, but is my country doing what it is expected to do for me and everyone else?”

Most of us seem happy to see many wonderful things around us as India marches towards its aims. At the same time, we are also concerned about much of what is happening around us. Thinking more deeply, I have come to conclude that the problems can be articulated and classified under these causal categories:

I. India against Indians II. Indians against India
III. India against India IV. Indians against Indians

These categories mean we take responsibility for the condition we are in. I thought most of our problems as a nation and its people could fit into these baskets. Here is a brief description of what these four baskets are:

I. The State and Nation are against the individual or collective of citizens. For example, there is lack of accountability in the state administration.

II. Individual or collective citizens against the Nation / State. For example, people spitting and dirtying public spaces with complete disregard.

III. The State and Nation are against the cultural, social and heritage of its people. Here, the administration goes against the ethos and values of the civilisation and culture. For example, the government mismanaging civilisation heritage that is priceless or the state treating citizens consistently unequally via reservation.

IV. Individuals and part of collective citizenry against other individuals or collective citizenry. For example, rampant and pervasive double-sided driving, even in Mumbai, where citizens don’t care about fellow citizens on the road.

The government/s, and for that matter, government as an institution, like to exhibit their achievements and hide their shortcomings, failures and disasters. One can consider this at a human level to be part of one’s nature; but at an institutional level, it is dishonesty. India goes a step further when it deifies or exalts its leader/s in a disproportionately larger way and tries to show that there is one person/leader responsible for all good and all credit is due to that leader alone, but all the wrongs have no connection with the leader/s at all.

EDUCATION: THE PATH TO A BRIGHTER FUTURE

In this article, I wish to cover a critical aspect that will pave the way to a great future — Education. We don’t hear much about education in the news; definitely not as much as we hear about Vande Bharat trains, bridges and houses being built, etc. Culture and Education are fundamental building blocks of a nation. By culture, we mean integrity, ethics and value systems displayed in individual and collective behaviour. Education is perhaps a more empirical aspect, which means developing and cultivating skills and capabilities to make the country and individual lives better. Culture and Education have a link as they both feed each other.

Today, what we see clearly shows that education is lacking and lagging: Lacking, in elements and focus, and lagging momentum in transformation and impact. These are visible for all to see; one doesn’t have to be a statistician or keen observer.

The Problem: More or Better?

The Government controls education; largely, the states take care of elementary education and many other bodies. The approach has been: Let’s give more public money, and things will sort itself out. More money, more schools, more teachers and more students. Bigger, better, faster. There isn’t much data about the effect of such spending, and the Government as an institution stands for spending without rigorous accountability. India gives about 3 per cent to education in budgets as against the target of 6 per cent of GDP (National Education Policy 2020 and 1964–66 Education Commission recommendation). In so many decades, this target has never been met. Brazil and South Africa allocate above 6 per cent to education. The benefits from a social perspective are even more. As Pythagoras stated 2,000 years back, “Educate the children and it won’t be necessary to punish the men.”

Output and Outcome

India focuses on Output; for e.g., number of people enrolled in schools. But it doesn’t focus as much or even adequately on Outcomes: are students able to have a grip on language and arithmetic that is expected at a certain age? Even today, the poorest people send their children to private schools no matter how badly situated they are. Despite higher fees charged by private schools, government schools are not preferred1. We have recently seen UP teachers protesting for being asked to come on time.

1. James Tooley’s research calls this grassroots privatisation. These schools, even if run by unqualified teachers, outperformed state-run schools. His book The Beautiful Tree is well acclaimed.

Private schools are better in terms of outcomes. The government doesn’t provide or collect much data about Per-Pupil Expenses. We all know that even legislators, at all levels, have their children enrol in private schools rather than public schools. Some experts suggest that the government would perhaps be better off transferring money directly to individual students to join any school they want on the lines of Direct Benefit Transfer (DBT). What is happening currently is on the lines of PDS. We need to fund schooling and not schools. Let students and parents decide where their child should study. It is a matter of concern and even shock that after 75 years, we are struggling with aspects as important as education; despite taking cess from taxpayers, its outcome seems questionable and certainly, below optimal.

ASER2 Surveys3 – These surveys are carried out in 28 districts in 26 states, reaching 34,745 youth in the 14–18-years-old category in 30,374 households in 1664 villages. 25 per cent of students in Class V cannot read Class II texts in their own language fluently. The 2023 report found that among 14–18-year-olds, 1 out of 4 could not read Class II texts. More than 50 per cent could not do the basic division of dividing 3 digits by 1 digit. However, there are many positive findings, too, and trends of improvement.

2. Annual Status of Education Survey
3. https://asercentre.org/wp-content/uploads/2022/12/ASER-2023_Main-findings-1.pdf

OECD PISA – Runs a random sample of 15-year-olds on fluid general intelligence. India doesn’t like it much. Once it carried this OECD PISA measurement in two states. India is no longer participating in this global survey.

Qualitative Aspects

Much of the nature of education was and is meant for developing babus and industrial workers to run the industrial administrative machine. It means learning that is rote, not based on problem-solving, not broad enough, too many irrelevant things for too long, not focussed on common flow intelligence and so on. This is a whole area in itself and therefore, let’s leave it at that. Many schools pass students all the way to Class X. While this has some good effects, there are side effects too that people who come out are not capable enough to do basic language, arithmetic, science, general intelligence and critical thinking. There is also caste-based education where students are asked for caste certificates in cities like Mumbai for admission. This not only reinforces divisive aspects of lower identity (instead of national identity or being a student) in students but also slows things down.

Social Problems

Now, India has this failed theme called socialism, where the private sector is abhorred. Look at the airlines — we bought tickets from Indian Airlines, which cost ₹16,000 to Delhi 20–30 years ago, when very few took flights to Delhi on two Sarkari airlines. We didn’t have landlines except without waiting. Education remains in control of the Sarkar. Higher education, like Engineering colleges and medical colleges, charge a lot of fees out of reach for most middle-income families and are controlled by politicians. Its root can perhaps be summarised in what Nehruji said to J R D Tata: “Never talk to me about the word profit; it is a dirty word.”

But it is possible, as see in the cases of hospitals like Narayan Hrudayalay, Indian pharma companies like Cipla developing the cheapest medicines in the world, etc. Yet, they all need to make profits whether for taking on that venture or for ploughing back for expansion. India continues to control everything instead of letting markets play out through competition like it has happened in airlines or retail, or license raj regime and so on.

Reservations

An issue that segregates people to give birth-based benefits has over-lived its life since envisaged reservations were first considered. They were to end in 10 years, which was way back in the ’60s. Benefits should be based on need – a poor person needs something; he cannot obtain it and therefore must be provided for. How is a need attached to anything but lack? India attaches need based on caste or religion or some such lower identity. This is insane, to use a decent word. Charlie Munger, when asked about India, said that India “assimilated the worst stupidities of the democratic system”. Look at the recent case of the IAS trainee who faked her certificates4. For medical, there is about 74 per cent reservation in Maharashtra, not only in UG but in PG levels too. How far can reservation continue? Despite SC’s decision to cap, state governments can’t just stop raising it above the 50 per cent limit. What it does is make Indians vie to obtain a lower identity to obtain reservation benefits. It is forcing more and more people to call themselves “deprived” and “destitute” in identity! I wonder whether such a thing would be happening anywhere else. Bangladesh recently had riots, causing the newly announced reservations of just over 50 per cent to be struck down.

4. Pooja Khedkar news reports

This monster doesn’t stop at education. It continues at the job level too. We have become a country where so many people dream of leaving India or are pushed out as they cannot find a job on merit. Yet, most think this pattern is akin to living the key word in the he preamble of the constitution: Equality.

Skills Crisis

We have people with degrees who cannot find jobs. There is unemployment, and there is un-employability. On one side, we have too many people with degrees looking for jobs; and on the other side, we have too many jobs that cannot find people with the requisite skills. We see peon jobs being applied for by unemployed PhDs. But that’s just the tip of the iceberg. So often, we see lacs of people apply for a few thousand vacancies. Adani was in the news due to a request to allow the Chinese to come here as they couldn’t find suitable staff for their projects. The same is true for TCS and L&T, as reported in recent news.

The 2024 Economic Survey says 50 per cent of Indian graduates are not employable and 65 per cent of people under the age of 35 have no skills5. This is not good news; although the trend is reported to be improving. We need to have education that leads to capabilities and then to employability. With things becoming less menial, this problem will be accentuated. The recent budget of July 2024, after 10 years, seems to have realised that skills are important and higher education will make a difference. Countries like Germany have a scheme where college students start at a real-life place to obtain skills. Indian UG medical students take classes for three years before being exposed to real-life medical situations or hospitals. Nurse colleges are today not linked to hospitals like medical schools as per Dr Devi Shetty6. This situation is made worse by absolutely ridiculous policies. Today, as per Dr Shetty, known as the “Henry Ford of heart surgery”, he cannot teach in a medical college as the system doesn’t allow him despite him being one of the top surgeons in India. This is how India defeats Indians.

5. Para 5.14, Page 158
6. https://youtu.be/v_jj3198IuE?si=nrlAgbe6VB2hhqq9 – recent interview with Smita Prakash

The UP school teachers’ protest for being asked to come on time shows the discipline level the teachers demonstrate. Most Sarkari jobs mean – once you are permanent, then people chill or rather become less effective. Job is more important and not outcome that the job is meant to deliver. They are entitled but not accountable. This is why, there is a big rush for Sarkari job openings. Of course, nothing can be generalised, but, certainly much of this is not an aberration.

What to do?

Well, it’s written on the wall but not on Sarkari walls. We need to fund schooling and not necessarily schools. The government tries to get into everything. Just as roads are built on PPP, “we” need to do this more and involve the private sector. In Sweden, government-funded vouchers can be used to go to any school. Give money to parents. Education vouchers (Milton Friedman’s idea) are needed and not necessarily government schools. This is the only way to beat reservation. It’s unfair to say, “If you come to a government school, I have money to spend on you, if you attend a private school, I have nothing to give you”. At many locations, in the experience of those who work in the sector around Umbergaon, Gujarat, the teachers are empowered and a healthy competition is developed by encouraging teachers to bring students up.

Because the government wants to provide benefits with so many conditions, it cannot control how this funding is done. Today, the data is there from Aadhaar and other means, and with technology government knows who needs what. DBT database is available. Education vouchers can easily be given if Mobile – Aadhaar – Schools are linked. Recently like India Stack, we saw Agriculture Stack. We perhaps now need an Education Stack also. Private entities can monitor public schools instead of the Sarkari system. Most people in OECD countries attend public schools. Why does this not happen in India? Why can’t public school teachers not be sent to private schools for some time or vice versa? Can private schools adopt a class or a subject in public schools? There is obviously political control and obstruction. We need more ideas to remove the lack and faster execution to remove the lag.

CONCLUSION

Add all the issues: paper leaks, low-quality public infrastructure, low quality of teachers in government schools, people running away to other countries for jobs after education if they can, so many seeking certificates of being deprived or of certain identity for benefits, government control, huge competition from age two to get admission, shortage of nutrition and the rest, and the resulting answer is that India is far away from its ideal and off track all over the place.

The point is if this area of education is not fixed, then a $5 trillion economy won’t matter. Considering the $2,800 per capita GDP of India and the mindset of leadership and people, the situation is grim. After massive reservations, along with frauds built into that system, without fixing education on a war footing, even the $10 trillion economy won’t make the desired difference. To me, for the economy to be a $5 or $10 trillion economy, education would have to be made into an engine and not a side ministry.

Previous Article on Chatting up about India: Technology not just for a few, but for all, BCAJ, September 2023.

The Indian Income Tax Act – Need For A Substantial Re-Think

The purpose of this Article is to request a fresh thinking in the way the Indian Income-tax Act, 1961 is applied for computing income tax payable for Individuals and Corporate Businesses.

I. TAXABILITY OF INDIVIDUALS

We are aware that any individual who is earning income will largely get the Income from two main sources where he carries out active economic activity. Those sources are:

a. As an employee — where he gets salary, which salary is subject to income tax and to the provisions of tax deduction at source (TDS);

b. As a businessman — where his income is his share of profits from the business or vocation that he is running.

In both cases (a) and (b) above, the individual pays his income tax and the balance in his hands is his post tax income.

This post tax income will be divided into two parts:

i) Consumption of Goods and Services.

ii) Savings.

Consumption of Goods and Services will be spending on Food, Accommodation Rentals / maintenance expenses, utilities and telephone services, education of children, professional upgradation of self, payment of loan instalments and interest thereon (residence or other assets purchase), vacations / travel, conveyance expenses, purchase of assets for personal use, personal and family entertainment, etc.

Savings will be invested into Government provided investment opportunities, bank deposits, Mutual Funds and listed / unlisted Shares investments, gold and precious metals, etc. It is difficult to understand why certain Central Government investment opportunities like National Savings Certificates (NSC) interest are taxable in some form, but interest accrued on Public Provident Fund Investment (PPF) and Sukanya Samruddhi Scheme (SSS) are not taxable. Similarly, investments in bank savings and deposits accounts have a tax free eligibility up to a certain amount and then the interest becomes taxable. Agree that the investment opportunities have different timelines (which can be met by interest rates changes), but why have an income tax treatment differential on investments into central government approved savings schemes or banking channels which are the lubricant to the Indian economy?

Why have different sets of computation of income tax liability for Government / public sector employees and private sector employees. Please see illustrations below for some Inflows to such individuals:

1) Pensions — commuted pensions: These are lumpsum payment to the person based on the value of his corpus accumulation. Uncommuted pension is normally monthly pension and is treated as ‘salary income’.

[The author acknowledges the above chart is from the cleartax website1]

1   https://cleartax.in/s/are-pensions-taxable.

Just as agriculture income is totally exempted from income tax, can’t income from uncommuted pensions also be declared fully exempt from income tax for all individuals getting pension income? The nation is paying back its debt to seniors who have contributed to the nation in the past — through work activity and tax payment.

2) House Rent Allowance:

Key points to remember when claiming HRA exemption2

  •  Unless you are actually paying rent in excess of 10 per cent of your salary, you will not be able to claim any exemptions on house rent allowance.
  •  Those working in public sector companies get an HRA exemption based on the minimum or maximum HRA in different cities, according to the recommendations of the 7th Pay Commission.
  •  If you fail to submit rent receipts to your employer, the employer will not factor in the HRA exemption and will deduct tax from the entire HRA amount.
  •  The tax exemption of HRA is not available, if you choose the new tax regime from the financial year 2020–21 (assessment year 2021–22).
  •  Those paying rent to NRI landlords should deduct TDS of 30 per cent, before making the rental payment.
  •  India’s Income-tax law does not mandate that the tenant has to pay the same landlord throughout the year. So, the number of times you change places during the year makes no difference as far as exemptions are concerned.
  •  You cannot claim exemption for the period for which you have not paid rent.
  •  There is no legal restriction on the mode of rent payment either. You could pay the rent in any manner —cash, cheque, online channels, etc. All you have to do, to claim the exemption, is to produce proof of making this payment. Your bank account statement, for example, acts as the perfect proof in this regard.
2   Extracted with acknowledgment from: https://housing.com/news/hra-house-rent-allowance-tax-exemption/

Please see Bullet 2 above. We need to move towards uniformity of tax treatment for all individuals for similar nature of Income, regardless of nature of employment.

Let us look at interest income for an individual from various sources:

  1.  Bank savings and fixed deposit accounts;
  2.  Dividends from shares;
  3.  Interest from Corporate Deposits and debentures.

Income from (1) and (3) above are earned from post-tax savings investments. The case of Dividends income (2 above) is possibly the saddest. Dividend income is declared by corporates only from their post income tax profits (profits after tax). The investor in shares has made the investment after income tax is already charged on his income. Despite this scissors effect of income tax at corporate and individual level, dividends are considered as fully taxable in the hands of the individual investor. It must be noted that the Finance Ministry recognizes the injustice of taxing dividend income and hence has played with the concept of ‘Dividend Distribution Tax’ (DDT) payable by corporates on dividend distribution, but the corporate lobby was stronger on objections and the individual had to absorb the income tax, by DDT concept being done away with.

In India, individual income tax is very unjust and inequitable since it exempts a large section of income earners (agriculturists) and squeezes the salary employee and pensioners. At least, on interest and dividend earnings which Principal amount investments are funded by post tax income, relief can and should be offered.

II. TAXABILITY OF CORPORATES’ PROFITS

We are aware that corporate profits are computedby deducting expenses from income and then various other allowances and disallowances being added / deducted from corporate profits before tax to come to the eligible corporate profits for corporate income tax purposes.

In India, one of the biggest issues confronting the banking sector is Non-Performing Assets (NPAs). Simply put, a NPA is inability of the Borrower to fulfil interest and principal instalment payment obligations on due date/s. This happens when corporates have borrowed an amount which their business is unable to service.

NPAs also occur due to the tendency of Indian business promoter families to play the business funding game with external Finance (Borrowings) and not own finance (invest in share capital at proper share valuation). In many cases, the external borrowings are managed through connections, influence, financial jugglery of numbers, etc. Effectively, NPAs put the brakes on Banks being able to fund higher Business activity because of their own liquidity problems. A study of many Indian corporates in business trouble would show high unsustainable borrowings compared to Net Worth (share capital + reserves).

Fortunately, the Supreme Court by it’s judgement3 — has ruled that personal guarantees issued by Promoters are actionable and can be called upon for realisation proceedings of corporate insolvencies under the Insolvency & Bankruptcy Code. This Code faced many challenges from impacted Promoters who felt threatened.

3   Source: https://timesofindia.indiatimes.com/india/personal-guarantors-can-face-insolvency-proceedings-supreme-court/articleshow/105104947.cms

As a lender, one may try to improve bank funding parameters and caution points. Businesses are still able to get funding. Interest is a wonderful income tax shield, and also external borrowings reduce the need for owners to put own funds into expansion of their business. There is a need in national good to strike at the root of this problem. The problem is interest costs being eligible as a charge for computing corporate profits before income-tax. Also, in case of losses in a year, carry forward of losses is permitted wherein the interest cost element is included in it.

In India to control NPAs and to force corporate promoter family shareholders to put ‘skin in the game’, it is necessary that there is some variation in the way Corporate Income Tax Liability is computed under the Indian Income-tax Act, 1961:

Method 1

Add the entire interest cost to corporate profits before tax — this gives us EBIT (Earnings Before Interest and Income Tax). Then, consider the other allowances and dis-allowances to be deducted / added back and come to the corporate profits liable to Income Tax.

Note — EBIT as the starting point eliminates interest costs setoff in future as carry over losses. We are talking only interest charges and not any other financial charges like guarantee commission, bank charges, processing fees etc.

Obviously, because of this add back of interest expenses and to maintain equity in income tax charging corporate tax rate will have to be reduced. The new rate will need to be decided by the Finance Ministry. In my view, it could be around 12–15 per cent.

However, this method could work against the interests of infrastructure companies (road / tunnel / bridge builders), power companies and companies involved in heavy capital goods manufacturing like boilers, generators, etc. Such companies need a high Debt: Equity Ratio.

Method 2

Perhaps a more practical method would be for the Income Tax Act to define the Debt: Equity ratio based on nature of industry the entity belongs to. Normal industry requirement would be Debt : Equity of 2:1, the infrastructure companies would have a Debt : Equity of 3:1 or as may be determined mutually in developing this.

In this method, we need to compute average equity and borrowings. Average would mean Opening Balance + closing balance divided by 2. The audited financial statements would have these details.

To the extent of extra debt (debt more than average permitted debt), interest charges in that proportion would be disallowed or added back to corporate profits before tax for income tax liability computation. An example to explain this is as under:

  1.  Average Net Worth — ₹100 Crores;
  2.  Average permitted borrowings limit — ₹200 crores (2:1 ratio);
  3.  Actual average borrowings in the period / year — ₹250 crores;
  4.  Actual interest expenses — ₹30 crores;
  5.  Interest expense to be disallowed (added back)-[(₹250 crs — ₹200 crs)/₹250 crs * ₹30 crs)] = ₹6 crores.
  6.  Interest expense to be added back for corporate income tax purposes ₹6 crores.

Further, for the purpose of carry forward of income tax losses, the eligibility of this ₹6 crores expense is lost.

The problem of NPAs reduces the ability of banks to lend and RBI corrective measures require that if matters are getting out of hand, the bank is precluded from giving out any new loans. In a growth economy like India where the economy is also going through a formalization phase, the demand for credit will always be high.

Between Method 1 and Method 2 to keep corporates from going into high gearing and increasing the possibility of default on interest and principal payments on due dates, Method 2 needs to be very seriously considered and brought into the statute through the amendment of the Income-tax Act.

CONCLUSIONS:

A) Individuals:

1. At least in the case of Individual income tax we are aware that a very small percentage of taxpayers (through filing tax returns) are carrying the national load of individual Income Tax.

2. In fact, for individual taxpayers, there is a need to move to Expenditure Tax (based on withdrawals / spending) instead of Income Tax. That, however, is a major change of tax collection method and will require great political courage and working the structure as was done for Goods & Services Tax (GST). The individual tax collection mechanism moves from an Income base to an expenditure based tax, since individuals will transact through banks.

Note — it must be mentioned that most Finance Ministries across countries are not in favour of individual Expenditure Tax, and prefer Income Tax. However, in India individual Income Tax is unfair and has in-built inequity. We need to look at alternatives and just ways.

3. However, before Expenditure Tax can come in, let us at least be fair to the individual taxpayers and not have the concept of Income being taxed twice — once at the source and the other at the application (interest / dividend income come from post-tax savings investments). Such income must not be taxed again.

B) Corporates:

1) The advantage of the above proposal (Method 2 preferred) is that those who are conservative on borrowings will get the advantage of no add back to profits available for tax purposes. The more aggressive corporates could see interest expense add-back and a higher income tax provision and payment.

2) The Finance Ministry needs to seriously consider changing the corporate income tax computation basis to bring Method 2 into play. Give the Industry a 24–30 months’ period for changing their financial structure mix by bringing own funds into the business and reducing the borrowings amount (through repayments). Implement the change from the decided date and year.

C) Need For Change:

It is necessary that the Income-tax Act, 1961 be given a substantial re-think. After all, the Income-tax Act, 1961 is not just for tax collection, but also to send signals of executive intent.

Before the Expenditure Tax can come in, let us at least be fair to the negligible percentage of individual taxpayers and not have the concept of income being taxed twice – once on the source basis and another on its application. (interest / dividend income from post-tax savings investments).

D) Equity and Executive motive:

For the sake of equity and fairness to individual income taxpayers, the changes in the taxability of income need to be seriously contemplated and implemented. In the case of individual income taxpayers there is a need to soften the burden of taxation. In the case of corporate income taxpayers, a hardening of the taxation is required to avoid NPAs. Prevention is better than Cure.

RETHINKING THE IND AS 116 – LEASE STANDARD

We are aware that the above IND AS 116 brings in a new Leases accounting standard where apart from short term and low value leases with other minor exemptions, we have the Assets residing in the books of 2 parties – the Lessor and the Lessee.

Moving from the earlier Ind AS 17 to Ind AS 116, the following are the changes that are occurring from the Lessee’s perspective:

1)    Almost all Leases get recognized on the Balance Sheet as ‘Right of Use assets’ and ‘Lease liability’. The only exception being as already stated – short term and low value leases;

2)    Distinction between Operating and Financial Leases gets eliminated;

3)    Right of Use Assets need to show their depreciation charge for the year separately in the Schedules to the Financial Statements.

For the Lessor there is not much difference in accounting but for the Lessee there is a lot of pain of conversion of the Lease Agreements into ‘Right – Of – Use’ (ROU) Assets and ‘Lease Liability’. Accounting was made to stand on it’s head and the article that follows attempts to highlight the infirmities of the current IND AS 116 and proposes a different solution.

The writer is well aware that IND AS 116 is in a way a reflection of the IFRS standard on ‘Leases’ but as professionals we need to understand the apparent shortcomings.

1)    Shortcoming # 1 – It is believed that the reason why this Accounting Standard was conceptualized is because entities with large value assets like Aircraft, Ships, Transport trucks, etc were running the business on Lease Assets which were not reflected in the Fixed Assets block of those entities. Those entities / industry became Asset light and it was felt that disclosures on Business Profitability such as EBITDA % and Return on Capital Employed % were distorted. However, while across the World there may be a few thousand lessors, there are millions of lessees and this Standard has increased the workload of millions of entities, with no apparent benefit.

2)    Shortcoming # 2 – In the new Standard the Lessee has to account for ‘Right – Of – Use’ Assets and ‘Lease Liability’. An important question that arises is that these ROU Assets should have no value as Asset Cover for the purpose of taking Loans (asset backed long term loans). Technically, we have High Value Assets in the books of Lessees which cannot be used as Asset Cover for taking Borrowings. The real owner of the assets is the Lessor. However, this Lease Standard shows both the Lessor and Lessee owners of the same asset class, though the Lessee has to make a separate disclosure.

3)    Shortcoming # 3 – The Lessee in his books of Accounts has to Account for Asset Depreciation, Interest on the Liability of Lease Asset funding and the reduction in liability as lease rentals get paid &discharged. The real danger is in artificial increase of Depreciation and Interest Costs in the Statement of Profit & Loss while lease rental costs come down. However, for EBITDA %, both these inflated costs are added to Profit before Tax. Similarly, for Return on Capital Employed %, inflated interest costs are added back. Without any effort on the part of Corporate Management of the concerned entity – the EBITDA and ROCE % rise, which is a severe distortion when it comes to trend analysis. Both these EBITDA and ROCE % ratios improvements should be a reflection of management actions on the entity business.

4)    Shortcoming # 4 – The Structure of the Cash Flow Statement of the entity changes. Since lease rentals costs will not be there for these ROU Assets, the net Operating Cash Flow will appear higher. Lease liability payments and related interest payment are shown under Financing activities. We therefore see a shift in net Operating Cash Flow improving but net financing activities having a greater payout.

Having raised issues on the shortcomings of the IND AS 116 Leases standard, the issue is how this could have been avoided through better disclosures in Notes forming part of the Financial Statements. They are:

A)    In the Books of the Lessor entity:

a.    List of Lessees with values and Type of Fixed Asset funded who comprise 80% of the net depreciated value of Leased assets. Balance 20% are considered as others;

b.    Break up of these Leased Assets on Asset Type with disclosure of Gross and Net Depreciated values at start of year (period) and end of year (period);

c.    Whether lessees in Para (a) are paying their lease rentals as specified for the year / period;

d.    In case of default in payment of lease rentals by Lessees – disclosures by names (per para (a) above) and the Type of asset where lease payments are in default;

e.    Indicate whether provisioning for bad / doubtful lessees has been done and the Asset types where such provisioning is required as per audit requirements.

B)    In the books of the Lessee entity:

a.    Types of Assets taken on Lease at Gross Value of Lease Rentals payable, cumulative total lease rentals paid up to the period end and balance lease rentals payable in the future periods;

b.    Any lease rentals due and not paid up to the end period of review per Type of Asset;

c.    Lease rentals expense charge in the Statement of Profit & Loss and whether this closely matches the number of days of yearly lease rental as accrued expense;

d.    The names of Lessors who have funded 80% of the Leased Assets based at Net Lease Value Liability payable at the year (period) end. Others to be forming balance 20%. This breakup also to indicate Type of Asset leased;

e.    Are lease expenses properly booked per number of days expense liability for leased assets;

f.    Have lease rental payments been made as due or at the end of the accounting period there are unpaid lease rentals though payment due date has passed. The unpaid amount to be disclosed by Type of Asset.

It is possible to take the view that this ‘IND AS 116’ – Leases Standard could have been handled better with Disclosures rather than with bringing in a sort of Accounting heresy, the major shortcomings of which have been highlighted above.

It is hoped that Accounting Bodies and Institutes will take a relook and make the Accounting Standard more robust.

I must be willing to
give up what I am in order to become what I will be.

—
Albert Einstein

CENTRAL GOVERNMENT BUDGETS: RECEIPTS SIDE TRENDS AND LEARNINGS FOR FUTURE ACTIONS

We are all aware that the Budget document is a Receipts and Payments Statement of the Central Government for the year the Budget is prepared for and the comparative previous years.

The Central Government Budgets Statement of Receipts has four main breakups:

1)    Actual Receipts of the accounting year previous to the accounting year the Budget is being announced in.

2)    Budget Estimates of the current ongoing year as submitted when the Budget is presented to Parliament.

3)    Revised Budget Estimates of the current ongoing year ending being informed to Parliament.

4)    Budget Estimates for the year the Budget is submitted for Parliamentary approval.

Therefore, the Budget document for the year 2022-23 would have Actuals for 2020-21, Budget Estimates and Revised Budget Estimates for the year 2021-22 and Budget Estimates for the year 2022-23.

We need to understand that effective July 2017, GST replaced multiple indirect taxes. GST implementation was followed by periods of tightening controls and the two-year pandemic impact. The GST collections for the last three months (January – March, 2022) show buoyancy, and it is hoped that the buoyancy will stay intact as consumption revives, though inflation could impact consumption.

Table A – Composition of Central Government Budget Receipts

(In Rs.Crores)

Types of Receipts

Actuals
2014-15

Actuals
2017-18

Actuals
2020-21

Revised Estimate
2021-22

Budget Estimate
2022-23

Revenue Receipts

 

 

 

 

 

Corporation Tax

428,925

571,202

457,719

635,000

720,000

Income Tax

265,733

430,772

487,144

615,000

700,000

Wealth Tax

1,086

63

12

–

–

Total – Direct Taxes

695,744

1,002,037

944,875

1,250,000

1,420,000

Indirect Taxes

549,141

916,971

1,082,228

1,266,059

1,337,820

 

 

 

 

 

 

Gross Tax Revenue

1,244,885

1,919,008

2,027,103

2,516,059

2,757,820

Non-Tax Revenue

197,857

192,744

207,633

313,791

269,651

Total Revenue Receipts

1,442,742

2,111,752

2,234,736

2,829,850

3,027,471

 

 

 

 

 

 

CAPITAL RECEIPTS

484,448

702,650

1,883,105

1,516,877

1,739,735

Gross Total Receipts

1,927,190

2,814,402

4,117,841

4,346,727

4,767,206

 

 

 

 

 

 

Less – States share of Tax collection

(337,808)

(673,005)

(594,997)

(744,785)

(816,649)

Transfers to NCCF/NDRF

(3,461)

(3,515)

(5,820)

(6,130)

(6,400)

Total Receipts-Centre (Net)

1,585,921

2,137,882

3,517,024

3,595,812

3,944,157

 

 

 

 

 

 

Ratios

 

 

 

 

 

Direct Tax as % of Gross

Total Receipts

36.10

35.60

22.95

28.76

29.79

Indirect Tax as % of
Gross Total Receipts

28.49

32.58

26.28

29.13

28.06

States share of taxes – %
of Total Tax Revenues

27.14

35.07

29.35

29.60

29.61

Total Taxes as % of
Gross Total Receipts

64.60

68.19

49.23

57.88

57.85

Capital Receipts (incl. divestment) as % of
Gross Total Receipts

25.14

24.97

45.73

34.90

36.49

Income Tax as % of  Gross Total Receipts

13.79

15.31

11.83

14.15

14.68

Source: Budget Documents uploaded on Internet

The Budget process could be used for the following disclosures and computations purposes:

1)    Disclose amounts the Government of India (GOI) may have to pay towards various forms of subsidies to state governments, corporates, devolution of tax revenues etc. Let the dues be computed on an accrual basis less the amounts considered as paid through the budget process. The balance liability should be shown as dues payable.

2)    What is the future pension liability on an actuarial basis the GOI is carrying?

3)    What are claims against the GOI from domestic/overseas corporates or governments (including state governments) though they may be in dispute from the GOI end.

4)    If there are tax or other commercial claims by the GOI against corporates – these claims could be split into private sector corporates and public sector corporates. If there is a commonality between disputes by both private and public sector units, instead of the revenue authorities wasting taxpayer money by proceeding against companies on the strength that their tax claims are correct, should they not have serious discussions within themselves and review whether the tax claims made by them are tenable and they have not gone into a classic tax overreach. This could be a very important decision because much of judicial time and taxpayer money could be saved.

In the disclosures of the above four restricted points, the Government of India is being requested to provide information that all Indian corporates are expected to provide at the time they submit their audited accounts to stakeholders. It makes for superior disclosures quality and would be very useful at the time of country ratings and review of financial and economic management.

The time has come for India to not just have an Inflow/Outflow of Funds Budget, but also to reveal that which has not been considered in the Budget process as liabilities which may have to be settled in the future or look at the tenability of claims that they are raising. The fair value of assets in terms of claims would then be known. Recognition of assets and liabilities are important elements of a budgetary process. You can manage inflows/outflows until the day of reckoning arrives but being aware of liabilities and assets, and open disclosure of the same will force an action mode.

SMALLCASE INVESTING – AN INNOVATIVE CONCEPT FOR RETAIL INVESTORS

A mutual fund investor spreads his investment across a basket of stocks by investing in units of mutual funds. An investor can also invest in Sectoral Mutual Funds like Pharma, Banking, Infrastructure etc.

Thematic investments is a broader approach to identify financially sound and sustainably growing companies whose business models are based on particular themes or ideas and would include companies across market capitalization and sectors. Thematic investment philosophy involves identifying curated or theme-based stocks which support a particular idea or theme like Rural Development, Robotics, Future Mobility, Make in India etc. However, an investor willing to invest in direct equity would have to spend considerable time in identifying such stocks and executing individual orders for stocks instead of a single click order to invest in a basket of the thematic or curated portfolio of stocks.

If you have a perfect investment methodology and philosophy but lack time of investing in specific stocks or funds, then Smallcase Investing is an option for you.

Bengaluru-based Smallcase Technologies is a start-up by three IIT graduates, which have introduced an exciting technology-based platform for modern retail investors allowing them to invest in a basket of stocks / mutual funds that reflects an idea or a theme. Each theme consists of professionally tailored baskets of stocks that reflect an investing theme, idea or strategy.

This concept is very popular in the developed markets and is made available by various intermediaries like Motifs, Personal Capital, Tiger Brokers, Cazenove Capital and Jarvis Securities.

While Smallcase was initially incubated by Zerodha but have now collaborated with several online brokers (13 as of now) including Kotak Securities, HDFC Securities, 5paisa, Edelweiss, Zerodha and Axis Securities. Smallcase has gained popularity among new and young investors and has become synonym with a curated portfolio-based investment strategy. An attempt has been made in this article to explain the concept illustrating the platform provided by Smallcase and can be applied by investors to other service providers offering a similar platform.

Smallcase ecosystem consists of:

•    Technology platform provided by Smallcase – They charge fees to Smallcase managers for providing the platform.
•    Trading platform provided by Stock Brokers for the execution of trades by investors – They charge commissions to investors for the execution of trades through their trading platform.
•    Research and Advisory Services provided by Smallcase managers who are SEBI registered Investment Advisors, Research Analysts or Portfolio Managers (PMS) – They charge fees to investors (either a fixed fee or percentage-based fee).
•    Investors – Investors have the option of investing on a thematic basis.

The following table shows the comparison with a mutual fund:

 

PARTICULAR

MUTUAL FUND

SMALLcase

Ownership

You own units of the mutual funds and not the underlying stocks

In the case of Smallcase, you directly own the stocks. Equity
Mutual Funds only need to disclose their holdings once a month, so you don’t
necessarily know what your fund owns at any given time (this is not
necessarily a bad thing given you have delegated the task of picking stocks
to the fund manager). With Smallcase, you know exactly what you own because
the holdings sit in your Demat account

Holding Pattern

Mutual funds investors own units of mutual funds, which are
separate from stocks. So, the holding pattern is based on mutual funds units
and not related to stock

Smallcase investments give direct control over the holdings. The
shares are held directly in the investor’s Demat account, and the dividends
are transferred to the bank account. Also, in case a particular stock isn’t
performing well, the investor can sell those shares and continue to hold the
remaining part of the Smallcase

Taxes

A mutual fund where the investor pays tax
only upon redemption of units. Hence the overall tax burden in this structure
is expected to be higher

Every time investor sells the stock, he shall pay short-term
capital gains tax

 

Lock-in

If mutual funds investment is redeemed before the expiry of the lock-in
period, it may even attract an exit load

Investment through the Smallcase platform does not have a
lock-in period

Portfolio Diversification

Mutual funds offer a wide variety of diversification, as mutual
funds can invest in 100+ companies

Smallcase follows a strategy, idea or theme and investment in a
particular Smallcase is restricted to a particular strategy, idea or theme.
So, the diversification is limited to a particular strategy, idea or theme

Capital requirement

Mutual funds investors have the option of buying mutual funds
units, thereby even small investment by investors is feasible

Smallcase requires a higher capital for investing in comparison
to mutual funds. In a Smallcase portfolio, one has to invest in at least 1
share of particular shares, thereby requiring higher capital investment

Expense Ratio

The mutual fund expense ratio is determined by SEBI and its
range is between 1-2%

Some Smallcase are open to the public, while some are with a
subscription. Some cases are created by the in-house teams, while some by
external analyst companies. Therefore, the charges vary accordingly

Exit load

Some scheme of mutual funds can charge up to 1-2%

There is no exit load in Smallcase

 

HOW IT WORKS
The platform offers a user interface to invest in multiple baskets of stocks / ETFs based on a theme selected by the investor. An investor can either invest in a Smallcase created by SEBI registered individuals / entities such as registered investment advisors, research analysts or portfolio managers or create his or her own Smallcase with two or more stocks or ETFs.

For Example, if an investor wants to invest in the theme of growing rural consumption in India, they can directly buy a Smallcase that is curated by experts representing this particular theme. The underlying constituents of the Smallcase would have stocks that would form part of the underlying theme along with the weightage assigned to their share in the overall basket.

The investor can place a consolidated order for all the underlying stocks with a single click through his respective broker. In case of any issue of order fulfillment, the investor can repair the Smallcase later by replacing the fresh order and ensuring the portfolio complements the original theme.

The professionally managed Smallcase are periodically updated by the Smallcase manager to continue tracking the underlying strategy or theme. These updates in the portfolio composition are shared through the platform to the investor so that the investor can make the changes to reflect the updated composition.

The investor has the option to exit the Smallcase which would trigger sell orders across all the underlying securities within a Smallcase. In every Smallcase, investors can set up a SIP (Systematic Investment Plan) to invest a fixed amount to the selected portfolio every month following the first investment.

USING SMALLcase INVESTING OPTION
• Choose: Go to the Smallcase website and click on login. You have to use the credentials provided by your broker to log in. However, if you use any other broker other than mentioned above, you may not be able to access the services.

• Buy: Once logged in, the investor has the option to choose from the array of themes such as all-weather, smart beta, bargain buys, electronic vehicles among others.

• Track: You will now be able to see stocks that form part of the portfolio, their proportion and the rationale behind their inclusion. You can customize the Smallcase by adding or removing stocks.

• Manage: While some brokers allow you to create your personalized Smallcase, others offer curated Smallcase.

It offers the convenience of one-click investing for transacting in a basket of stocks. Once the theme is selected, an investor can also opt for SIP (Systematic Investment Plan) similar to Mutual Funds.

Any investor can create its own model portfolio (Smallcase) or invest in professionally managed Smallcase created by SEBI registered entities or individuals such as research analysts, registered investment advisor (RIA) etc. The creation and management of Smallcase are restricted to registered entities only.

The concept of thematic investing is fast gaining popularity among retail investors who prefer DIY (Do it Yourself) stock / MF selection. In fact, theme-based stock / ETF investments are becoming akin to Smallcase. The concept is riding on the bull market and is yet to face a major market correction that will test the inherent quality of underlying research. It is advisable that investors should do their own due diligence before investing instead of just getting carried away with market sentiments.

Note: The purpose of this article is only to make the readers aware of the concept which is gaining popularity amongst investors and is not to influence readers to trade or invest. The reader should exercise caution before they start using the platform.

THE NEW EDGE BANKING

WHO CONTROVERSY: LACK OF GLOBAL LEADERSHIP IN CORONA CRISIS

 

 

INTRODUCTION


When the metaphorical ship of a growing,
prosperous world hit the figurative iceberg of Covid-19, it sank and it sank
like no ship had ever sunk before. While all of this happened, the WHO behaved
very much like the band in the movie ‘Titanic’ that continued to play songs
while lives were lost and the ship sank.

 

The World Health Organization (WHO) was
established on 7th April, 1948 and was entrusted with the responsibility
of creating a better, healthier future for people all over the world. It was
assigned the role of providing leadership on matters critical to health,
shaping the research agenda and stimulating the generation, translation and
dissemination of valuable knowledge. However, when D-Day beckoned, the WHO
failed and it failed gloriously. Just when the world was looking up to this
multinational body, it failed with repercussions that will perhaps only get
worse in the course of time.

 

Covid-19 has fallen like a clutch of bombs
on the world. As of today, the number of coronavirus cases stands at a
bewildering figure of 1,71,51,191 and has claimed 6,69,435 innocent lives. It
is truly astonishing that despite technical advancements, life-changing inventions
and incredible leaps in the field of medicine, we are still in such a situation
that things are worsening day after day, every day. There is perhaps nothing
better to showcase the gruesomeness of our reality. This is the question
uppermost in the minds of everyone, whether a daily wage labourer in a small
village in Uttar Pradesh, or a migrant worker desperately trying to go back
home from Mumbai to Bihar. The world today asks the same question and does so
in bewilderment when a prestigious and well-funded global watchdog for health,
the WHO, appears to have fallen flat on its face.

 

Let us look at the attitude that the
international health body has displayed. Look at the statements of some of its
members, such as Prof. Dieder Houssin, who is also a member of the Review
Committee, International Health Regulations. On 23rd January he
said, ‘Now is not the time. That’s a bit too early to consider that this
event is a public health emergency of international concern’.

 

These comments were made on the exact day
when the lockdown commenced in the city of Wuhan where it all started. It is
perhaps because of the sluggishness and negligence of such massive proportions
that we face a time where there is little hope for those who have to choose
between food on the table and contracting the deadly virus. The world today is
paying the cost for the blunders committed by the WHO. Its leadership has
proved to be ineffective and is likely to adversely affect the lives of
billions who now confront a prolonged tragedy worsened by an economic slowdown
of gigantic proportions.

 

Through this paper I attempt to draw the
reader’s attention to the shortcomings of and the blunders committed by the WHO
which have led us to where we are today.

 

BACK IN TIME


The SARS epidemic of 2002-03 had let loose
fear, concern and death in a similar manner. Even then, China was slow to
acknowledge the epidemic domestically and failed to inform the global community
about its possible spread.

 

During the SARS epidemic, WHO was quick to
recommend travel restrictions and criticise China for delaying the submission
of vital information that would have limited its global spread. Even after
eradication of SARS, WHO warned that the world would not remain free from other
novel forms of the coronavirus. The then Director-General of WHO, Dr Gro Harlem
Brundtland, implored the international community to investigate possible animal
reservoirs that could be a source for future outbreaks and better study the
movement of the virus to humans.

 

China’s wet markets were specifically
identified as a likely environment for the virus to incubate and jump from
animals to humans. The mutable nature of the virus, coupled with China’s rapid
urbanisation, proximity to exotic animals and refusal to tackle illegal
wildlife trade and commerce, were together termed a ‘time bomb’ by a research
paper in 2007.

 

As late as December, 2015 the coronavirus
family of diseases was selected to be included in a list of priorities
requiring urgent research and development. It was earmarked as a primary
contender for emerging diseases likely to cause a major pandemic.

 

JUMP TO PRESENT


Here is a list of mistakes that the WHO
committed. Had these been avoided, it could have changed the history of the
world as we know it today.

 

Mistake 1: Sluggish reaction

China informed WHO on 31st
December, 2019, while it was first public on news channels on 8th
January, 2020. Surprisingly, when a pneumonia-like virus was detected in Wuhan
in late December, 2019, the WHO reacted sluggishly. Dr. Tedros Adhanom,
Director-General of WHO, applauded China’s ‘commitment to transparency’ in the
early days of the epidemic in January.

 

 

Mistake 2: Denied human-to-human
transmission

The WHO denied evidence of human-to-human
transmission on 14th January, 2020 which has now become a famous
tweet by the WHO.

 

 

WHO refused to acknowledge the
human-to-human transmission of the virus despite several cases already showing
transmission. WHO also castigated countries like the USA and India who started
restricting flights to and from China or issued travel advisories.

 

Mistake
3: Ignored Taiwan which had critical information


One country that got their advice was
Taiwan, which also warned the WHO that it suspected the virus was spreading
through human-to-human transmission. Taiwan, which has one of the lowest rates
of known Covid-19 infections per capita among countries impacted by the virus,
was prevented from joining the WHO as a member country in 2015 by China which
refuses to acknowledge its independence. A newspaper headline of 3rd
April, 2020, said famously, ‘The WHO Ignores Taiwan. The World Pays the
Price’.

 

In late March, WHO Epidemiologist Bruce
Aylward declined to answer a Hong Kong reporter’s question about Taiwan, or
even acknowledge its existence.

 

As Taiwan was distributing facemasks to its
citizens, the WHO was advising the rest of the world that they were doing so
unnecessarily while initially the CDC and the US Surgeon-General followed its
lead; but health experts pointed out as to how mounting evidence that masks can
help slow the spread of respiratory diseases by about 50%, especially among
asymptomatic carriers in a population, and what the WHO maintained was
virtually non-existent despite mounting evidence to the contrary in
mid-February.

 

A CNN Health news article said, ‘Infected
people without symptoms might be driving the spread of coronavirus more than we
realised”

 

 

While Beijing informed the WHO on 31st
December, there are expert estimates that the virus had spread to humans as far
back as October.

 

 

Mistake 4: Delayed response


Even after being told, the WHO showed no
urgency to send an investigative team, careful not to displease the Chinese
government. A joint WHO-Chinese team went to Wuhan only in mid-February and
wrote a report with decidedly Chinese characteristics misleading the entire
world of the then situation.

 

A South China Morning Post article said, ‘Coronavirus: China’s first confirmed Covid-19
case traced back to November 17’.

 

Mistake 5: Misled the world


Covid-19 continued to exhibit
characteristics of a pandemic, spreading rapidly around the world. But not only
did Dr. Tedros Adhanom and his team fail to declare a public health emergency,
they also urged the international community to not spread fear and stigma by
imposing travel restrictions.

 

The global health body even criticised early
travel restrictions by the US as being excessive and unnecessary. It declared
Covid-19 as a pandemic only on 11th March.

 

Mistake 6: Criticised preventive measures


Following the WHO’s advice, the European
Centre for Disease Prevention and Control (ECDC) suggested that the probability
of the virus infecting the EU was low, likely delaying more robust border
controls by European states.

 

As the virus continued spreading across
Europe and reached America, WHO recommended that the travel industry maintain
the status quo. Dr. Tedros said on 3rd February: ‘There is
no reason for measures that unnecessarily interfere with international travel
and trade.’

 

 

Mistake 7: Didn’t learn from mistakes


Indeed, the WHO’s response to Ebola was
similarly criticised by the international community. This is not a first in
WHO’s history. In the 1950s and 60s, WHO found itself manoeuvring between the
Soviet-led Communist bloc and the US.

 





Mistake 8: Colluding with China


The first cases of the Wuhan virus were seen
as early as November but the Chinese government silenced the whistleblowers and
downplayed the threat. Dr. Lee Wenliang is one of those whistleblowers who died
as a hero trying to sound the alarm of coronavirus weeks before he contracted
the illness himself and died. The CNN news headline on 11th February
was: ‘China’s hero doctor was punished for telling truth about coronavirus.’

 

During such testing times, the WHO only
continued to please the authoritarian government of China. It praised China for
releasing the virus’s genome while neglecting to mention that it took them at
least 17 days to do so.

 

China also did not report human-to-human
transmission until late January, even though Chinese doctors suspected the same
at least a month earlier. WHO scientists weren’t allowed into Wuhan until three
weeks after the outbreak first came to light. While all of this happened, Dr.
Tedros continued to glorify the all-powerful regime by saying, ‘We would have
seen many more cases outside China by now if it were not for the government’s
efforts to protect their own people and the people of the world. The Chinese
government is to be congratulated for the extraordinary measures it has taken
to contain the outbreak’.

 

There is nothing hidden about China’s
efforts at undermining international organisations. Its growing clout in
international organisations is creating new fault lines in global politics and
the WHO has been an early victim. Remember, the WHO, led by Margret Chan in
2013 was one of the first international institutions to have signed an MoU with
China to advance health priorities under the Belt and Road Initiative.

 

China has not only attempted to censor all
official accounts of its early failings but has also employed an overt global
disinformation campaign, trying to pinpoint the source of the outbreak as the
US or Europe.

 

It is an irony of our times that the world’s
most potent authoritarian state (China) heads over a quarter of all specialised
agencies in the UN, ostensibly the centrepiece of the international liberal
order.

 

 

 

Mistake 9: Personal interest


Dr. Tedros, an Ethiopian politician, was
also seen as a China-backed candidate in 2017 for the Director-General’s
election. The ex-Health Minister of Ethiopia has favoured China in innumerable
ways which may be due to China having made a lot of investments in Ethiopia
under the One Belt One Road initiative and because Ethiopia does not want to
anger the red dragon. Dr. Tedros could also be favouring China because of these
reasons. In late January, he visited China and on 28th January he
met with President Xi Jinping in Beijing. Following the meeting, he commended
China for ‘setting a new standard for outbreak control’ and praised the
country’s top leadership for its ‘openness to sharing information’ with the WHO
and other countries.

 

Dr. Tedros said on 5th February
that ‘China took action massively at the epicentre and that helped in
preventing cases from being exported’.

 

Mistake 10: Political background


Dr. Tedros’ inaction stands in stark
contrast to the WHO’s actions during the 2003 SARS outbreak in China.

 

The then WHO Director-General, Dr. Gro
Harlem Brundtland, who had been the Prime Minister of Norway twice, made
history by declaring the WHO’s first travel advisory in 55 years which
recommended against travel to and from the disease epicentre in southern China.
Dr. Brundtland also criticised China for endangering global health by
attempting to cover up the outbreak through its usual playbook of arresting
whistleblowers and censoring the media. It is said that Dr. Tedros is not from
a political background, hence he is unable to face China bluntly and blame it
for the coronavirus.

 

Mistake 11: Funding


WHO has
required voluntary budgetary contributions to meet its broad mandate. In recent
years, it has grown more reliant upon these funds to address its budget
deficits.

 

This dependence on voluntary contributions
leaves WHO highly susceptible to the influence of individual countries or
organisations. China’s WHO contributions have grown by 52% since 2014 to
approximately $86 million.

 

CONCLUSION


It is an open secret among international
diplomats and public health experts that WHO is ‘not fit for its mission’,
riddled as it is with politics and bureaucracy. Given its previous failures and
the warning that was SARS, its leadership has no excuse for reacting in such a
sluggish and indifferent manner.

 

A global
pandemic does not occur every time a novel infectious pathogen emerges. It does
when there is an absence of accurate information about the pathogen and a
failure of basic public services – in this case, the failure to regulate food
and marketplaces to prevent the transmission of pathogens and the failure to
shut down transportation and control movement once it spreads. When authorities
regulate public health, share information about a pathogen and co-operate to
control its movement, diseases are contained and pandemics are unlikely to
occur.

 

The collateral price that the world has paid
for this lesson is perhaps too exorbitant. Hopefully, we will take a leaf from
this book and have better, more accountable and robust structures in place for
such pathogens that threaten all life on our planet.

                                   

Bibliography    

1.
https://beta.ctvnews.ca/national/health/2020/1/23/1_4779972.html

2.
https://www.bbc.com/news/world-asia-52088167

3.
https://www.youtube.com/watch?v=YA-x_XOe9T4

4.
https://www.ncbi.nlm.nih.gov/pmc/articles/PMC7112390/

5.
https://www.who.int/activities/prioritizing-diseases-for-research-and-development-in-emergency-contexts

6.
http://natoassociation.ca/belt-and-road-initiative-understanding-chinas-foreign-policy-strategy/

7.
https://downloads.studyiq.com/free-pdfs

8.
https://foreignpolicy.com/2020/06/16/china-health-propaganda-covid/

9.
https://www.theguardian.com/world/2014/oct/17/world-health-organisation-botched-ebola-outbreak

10.
https://www.usnews.com/news/world/articles/2020-02-03/who-chief-says-widespread-travel-bans-not-needed-to-beat-china-virus

11.
https://www.cnn.com/asia/live-news/coronavirus-outbreak-02-04-20/index.html

12.
https://www.bbc.com/news/world-asia-china-51409801

 

* The above article was chosen as the
best article from over 50 entries submitted at
‘Tarang 2020’, the 13th Jal Erach CA Students’ Annual Day organised
by the BCAS. One of the features of this year’s event was ‘Writopedia’.




Indian Firm made the world’s first cruelty free soap;
got Rabindranath THakur to model for it

The first rule of every manufacturing company is to
keep its process a secret. But Godrej brothers did the opposite and distributed
pamphlets in Gujarati that explained the process of making soaps from vegetable
oils. Did it establish trust and appealed a larger audience? You bet.

Rabindranath Thakur sits in his quintessential calm
position in a photo, hands obediently placed on his laps as he stares into the
abyss. Next to his portrait is a quote that reads, “I know of no foreign soaps
better than Godrej’s and I will make a point of using it.”

Yes, as hard as it may seem to believe, the Nobel
Laureate had agreed to endorse a toilet soap in the early 1920s. Not just him,
other freedom fighters like Annie Besant and C. Rajagopalachari also followed
suit and marketed the ‘Godrej No. 1’ soap.

The aim was to promote the first made-in-India and
cruelty-free soap and further strengthen India’s freedom struggle movement, and
the leaders made their political statements by requesting people to cripple the
economy of colonisers by boycotting foreign goods and instead opting for
something that is ‘for Indians, and by Indians’. 

Ardeshir Godrej, a businessman by profession and patriot
at heart, is the man behind starting this humble swadeshi brand in 1897. His
younger brother Pirojsha also joined the business and together they came to be
known as the Godrej Brothers.

Fast forward to 2020, a 122-year-old consumer-goods
giant, the Godrej Group controls $4.7 billion revenue. It comprises five major
companies with interests in real estate, FMCG, agriculture, chemicals and
gourmet retail.

Godrej has not only been an undying witness to India’s
rapid development but has also paved way for many ‘firsts’ in India including
springless lock, Prima typewriter, ballot box and refrigerators.

(Better India, August 7, 2020) 

HOW TO RESTART THE ENGINE AFTER THE LOCKDOWN

As India is
slowly MOVES towards a step by step removal of national lockdown imposed due to
the Covid-19 pandemic, there have been wide-ranging discussions in government
circles on what should be India’s strategy for an exit scenario. The Ministry
of Home Affairs from time to time has issued various guidelines for managing
with the Covid 19 impacts; Aarogya Setu App, state guidelines,mandatory wearing
of mask, social distancing amongst other 
elements in the fight against Covid-19.

 

With the
restarting of economy and life on the governments’ agenda,  various guidelines on ‘restarting’ India and
among these the most important one is to create Standard Operating Procedures
(SOPs) to ensure that preventive measures are executed  in a systematic manner post–lockdown;  the other guiding principles are as follows:

  • Guidance
    from Central Government, State Government 
    and WHO
  • Protection
    of personnel and visitors
  • Social
    distancing in travel to and from workplace and during interaction with
    suppliers and those in the distribution chain
  • Business
    protection and continuity
  • Implementing
    best practices for safety and prevention
  • Introducing
    audit procedures to monitor and ensure that safe practices are implemented and
  • Action
    plan in the event of persons feeling unwell at the workplace.

 

PROCESS FOR IMPLEMENTATION
OF SOPS

  • The
    organisation should begin with forming an internal team of Covid-19 fighters

The Covid-19
team should comprise of a factory / warehouse / shop / office in-charge, human
resource manager, business supervisor or head of business, administration /
utility in charge, medical expert on site (or identify the nearest medical
expert and security personnel). In case of local market or mandi
operators, the same can be managed by the market / trade association or local mandi
operator.

 

  • Prepare
    the SOP and plan for its deployment

Ground Zero: Online involvement of staff, if possible online training, to fight the
disease and restrict / minimal onsite interactions

Week 1: Framing the SOP; the company should get the SOP verified by the local
authorities or an internal / external expert

Week 2: Start operation as per government regulations; however, only staff who
have observed clear 14 days’ quarantine should attend the office; and only
necessary staff should attend in person, the support staff can operate from
home

Week 3: Organisations in manufacturing / trading or service should try and
achieve minimum capacity utilisation

Week 4: Entering this stage, and if all things go well and no additional
positive patients are identified in the organisation, then the capacity
utilisation can be increased by 20% per week moving forward, subject to
government guidelines.

 

The broader
framework of the SOP should cover at least the following:

 

1.   Identify the risk area

a.  Entrance

b.  Office meeting room

c.  Change room

d.  Canteen

e.  Shopfloor

f.   Restrooms

g.  Warehouse / storage areas, etc.

 

2.   Identify / implement the
mitigating measures

 

3.  Define the processes to be
implemented to prevent / report for Covid-19 occurrences based on severity

a.  If the locality is Covid-free,
then business as usual

b.  If the locality is in the
vicinity of an impacted locality, then business as usual with close monitoring

c.  Locality impacted and declared as
hotspot: severe impact

d.  Locality declared as containment
zone: highly severe impact

 

4.  Identify the person responsible for
implementation of measures

5.  Reporting to local health authorities /
municipal corporation or others

6.  Mandatory checklist for business continuity
plan post-lockdown to be implemented

7.  Regular monitoring, review and update of the
protocols.

(* Sector-specific
SOPs are recommended)

 

SUGGESTED ELEMENTS OF SOPS FOR SERVICE INDUSTRY

Client-facing
operations such as banking, insurance, other professional services, etc. should
consider continuing online / mobile servicing of clients where possible. Office
workers to include bare minimum staff required to run back-end operations. As
the risk and rate of infection drops in an area, officer attendance can slowly
be increased.

 

(A) Delivery of office supplies

  • All
    office supplies should be properly sanitised for each material movement (in /
    out / transport)

 

(B) Labour / employee

  • Social
    distancing norms to be defined and maintained
  • Mandatory
    wearing of face masks at all times
  • Disposable
    facemasks not to be  re-used, cloth masks
    to be encouraged
  • All
    washrooms to be sanitised, at least twice daily
  • Each
    employee’s temperature to be checked on entry
  • Staff
    showing any symptoms, even a mild cough or low-grade fever, to stay at home
  • Employees
    should maintain hygiene during transport from home to workspace / client’s
    place
  • Avoid
    in-person meetings to the extent possible.

 

(C) Office setup

  • Reduce
    staff movements onsite
  • Work
    From Home options to be made available to staff
  • Regular
    sanitisation of entire facility, including meeting rooms, offices, canteens,
    equipment, washrooms, machine touch points, operating panels, tissue boxes,
    hand sanitizers, seats and covers requiring human touch to be sanitized twice a
    shift
  • Social
    distancing during lunch break, batch-wise option or similar
  • Display
    posters promoting and instructing about respiratory hygiene
  • Workshop
    / guidance on maintaining occupational health and safety
  • Arrange
    seats so that employees / participants are at least one  metre apart
  • Maintain
    log of names and contact details of all participants of meetings for at least
    one month
  • Identify
    a room or area where someone who is feeling unwell or has symptoms can be
    safely isolated
  • Create
    follow-up protocol for a situation where a meeting participant / staff member /
    service provider tests positive for Covid-19 during or just after the meeting
    in conjunction with partner healthcare provider or local health department.

 

(D) Travel / business trip

  • Each
    employee to be tested before business trips
  • Avoid
    sending employees who may be at higher risk of serious illness or where
    Covid-19 is spreading
  • Employees
    should comply with any local restrictions on travel, movement or large
    gatherings
  • Employees
    who have returned from an area where Covid-19 is spreading should monitor their
    temperature and other symptoms for 14 days.

 

(E) Dealing with clients and partners

  • Social
    distancing norms to be followed
  • Promote
    video meetings as much as possible
  • Carry
    / ensure sufficient hygiene equipment such as hand sanitizer for all meeting
    participants
  • Visit
    only those client offices who have complied with the necessary requirements of
    Covid-19 prevention measures
  • Self-declaration
    at the gate and maintaining traceability and screening of persons entering the
    office premises.

 

(F) Dealing with bank / financial
institutions

  • Make
    effective use of online banking options

 

(G)
Infrastructure for safety of staff / labour

  • Surfaces
    (e.g. desks and tables) and objects (telephones, keyboards) need to be wiped
    with disinfectant regularly
  • Hygiene
    and social distancing to be encouraged for canteens and accommodation usage
  • Refrain
    from usage of ACs as much as possible.

 

The above is
an illustrative list and not exhaustive; additionally, industry / sector-wise
specific SOPs are recommended.

 

IMPLEMENT, REVIEW
AND IMPROVE

There still remains significant uncertainty about the
potential for more widespread transmission of Covid-19, hence organisations
should incorporate these practices as part of their Business Continuity Plan
and all the employees and people associated with the business should be trained
to deal with such situations in future. The implementation of the SOP and
checklist should be audited by the organisations as well as local authorities.

IN CELEBRATION OF 74TH INDEPENDENCE DAY INDIA: THE LAND OF CREATIVITY

Since time
immemorial, the land of India has been the loving land of the gods. All avataras,
vibhutis, seers and sages take birth here time and again. The history of
India is overflowing with the stories of such personalities. This has been a
blessed land where one chooses to be born again and again.

 

‘Far better it is
to win a few moments of life in Bharata than several ages of life in
these celestial regions; in that sacred land, heroic souls can achieve in a
moment the state of fearlessness in God by renouncing in Him all actions done
by their perishable bodies.’ Thus says the Bhagavata Purana, 5.19.21-23.

 


 

Indeed, this is the
land which has been the land of the seekers of the Truth, Light and Wisdom; a
land in which a dynamic spirituality holds the key to everything pertaining to
life and the world. This dynamic spirituality has given much strength to the
race that has been able to sustain its creative energy from time immemorial and
has been able to contribute positively towards the progressive evolution of
humanity. India in this sense is not just a loving land of the gods, but a land
of immense creativity.

 

The seers and sages
of ancient India had an immense scientific temperament. The quest was to find
out the truth of everything, but their method was very different from the ways
and methods of modern science. They did not view science as a test-tube culture
alone, but applied it to every aspect of life. They held a holistic view of
everything. They did not treat mathematics and poetry as two unrelated
subjects. This integrated vision of the seers and sages could create such a
great foundation that not only enriched life, but also gave strength to sustain
the creative energy uninterruptedly.

 

‘For three
thousand years at least – it is indeed much longer – she has been creating abundantly
and incessantly, lavishly, with an inexhaustible many-sidedness, republics and
kingdoms and empires, philosophies and cosmogonies and sciences and creeds and
arts and poems and all kinds of monuments, palaces and temples and public
works, communities and societies and religious orders, laws and codes and
rituals, physical sciences, psychic sciences, systems of Yoga, systems of
politics and administration, arts spiritual, arts worldly, trades, industries,
fine crafts – the list is endless and in each item there is almost a plethora
of activity. She creates and creates and is not satisfied and is not tired…’

 

This is what Sri
Aurobindo writes about the prolific creativity of our country in his book, The
Renaissance in India.

 

There has been no
branch of human knowledge in which India has not contributed. Most of the
discoveries for which we give credit to European scientists were well known to
ancient Indian sages.

 

They had the
knowledge of the science of Architecture based on which they could build cities
according to well-laid-out plans, roads with calculated widths, drains with
measured gradients, granaries with ventilation, baths constructed according to
angles of precision and platforms built to protect from the onslaught of
floods.

 

Some of the notable
ancient writings on Architecture include: Brihat Samhita of Varahamihira
(6th century), Samarangana Sutradhara of King Bhoja (11th
century), Manushyalaya Chandrika of Thirumangalath Neelakanthan
Musath (16th century), Mayamata (11th century), Silparatna
of Srikumar (16th century), Aparjita-Prccha of
Bhuvanadavacharya, Agastya-Sakalahikara of Agastya and Manasara
Shilpa Shastra of Manasara.

 

The science of
Medicine was well advanced compared to the system of medicine that existed in
the other parts of the globe during the time when there lived Acharya Sushruta
(Sushruta Samhita, between 6th – 12th century
BCE), Acharya Charaka (Charaka Samhita, between 6th – 12th
century BCE) and Acharya Vagbhata (Astangahrdayasamhita, 6th
century CE). Sage Divodasa Dhanwantari developed the school of surgery. Rishi
Kashyap developed the specialised fields of paediatrics and gynaecology. Sage
Atreya classified the principles of anatomy, physiology, pharmacology,
embryology, blood circulation and much more. Acharya Sushruta is known as the ‘Father of
surgery’. Even modern science recognises India as the first country to develop
and use rhinoplasty (developed by Sushruta). Sushruta worked with 125 kinds of
surgical instruments, which included scalpels, lancets, needles, catheters,
rectal speculums, mostly conceived from jaws of animals and birds to obtain the
necessary grips. He also defined various methods of stitching: the use of
horse’s hair, fine thread, fibres of bark, goat’s guts and ants’ heads.

 

The way plants were
identified and classified shows the immense scientific temperament of the
ancient seers and sages. They not only made a scientific and systematic
classification of the plants but could discover the exact properties of
hundreds of plants without any sophisticated laboratory tools.

 

In ancient India
there was also the science of Metallurgy which produced amazing results. With
the knowledge of this, the people could make such minute steatite beads that
300 would weigh only one gram and these they would adorn on beautiful necks. Rasaratnakara
of Nagarjuna (2nd century CE), Rasarnava (12th
century CE), Rasaratnasamuccaya (13th to 14th
century CE), Rasendra Sara Samgraha (9th century CE) are some
of the important works in which one finds the science of Metallurgy.

 

The credit of
discovery of aviation technology goes to Bharadwaja. His Yantra Sarvasva
covers astonishing discoveries in aviation and space sciences, and flying machines.

 

Sage Kanada (circa
600 BCE) is recognised as the founder of Atomic theory who classified all the
objects of creation into nine elements (earth, water, light or fire, wind,
ether, time, space, mind and soul). He stated that every object in creation is
made of atoms that in turn connect with each other to form molecules.

 

In the field of
Chemistry alchemical metals were developed for medicinal use by sage Nagarjuna.
His book Rasa Ratnakara is a fine specimen of India’s contribution to
Chemistry. The knowledge of baking of the earth for changing the soft mud to
hard clay and then painting the clay with colours to make beautiful pots, etc.
was very well known to the people of India.

 

In the field of
Astronomy and Astrology, India was in a very advanced position. It was possible
for the ancient Indian seers and sages to measure the sky at angles of 30
degrees and the position of stars as they lay randomly scattered in depthless
vistas. Indians were the first in the world to have done this and the Greeks arrived
only 2,000 years later.

 

Aryabhatiya of Aryabhata (5th to 6th century CE), Panchasiddhantika,
Brihat-Samhita, Brihat-Jataka and Laghu Jataka of Varahamihira (6th
century CE), Brahmasphutasiddhanta of Brahmagupta (6th to 7th
century CE) are some of the notable texts on Astronomy and Astrology.

 

The list of the
discoveries by the ancient Indian seers and sages is truly long. There has been
no branch of science in which India has not made its own contribution. One can
keep exploring the immense treasures available in the vast gamut of Sanskrit
literature, many published and many more yet to see the light of day.

 

The need of the
time is to awaken to the spirit of India and develop a deep sense of Love for
our Motherland, a thirst for the knowledge of her past glories, a burning
aspiration to serve her – this is all that we need to do for our country.

 

But at the same
time we must remember that we are not expected to make a return to the past,
but to take the glories of the past and map them to the present conditions with
the aim of creating a bright future. Our aim must be the future – the past is
the foundation and the present is the material.

 

In conclusion, I
present a wonderful passage from the writings of Sri Aurobindo:

 

‘Not only was India
in the first rank in mathematics, astronomy, chemistry, medicine, surgery, all
the branches of physical knowledge which were practiced in ancient times, but
she was, along with the Greeks, the teacher of the Arabs from whom Europe
recovered the lost habit of scientific enquiry and got the basis from which
modern science started. In many directions India had the priority of discovery
– to take only two striking examples among a multitude, the decimal notation in
mathematics or the perception that the earth is a moving body in Astronomy, – calaa
prithvi sthiraa bhaati, the earth moves and only appears to be still, said
the Indian astronomer many centuries before Galileo. This great development
would hardly have been possible in a nation whose thinkers and men of learning
were led by its metaphysical tendencies to turn away from the study of nature.
A remarkable feature of the Indian mind was a close attention to the things of
life, a disposition to observe minutely its salient facts, to systematise and
to found in each department of it a science, Shastra, well-founded scheme and
rule. That is at least a good beginning of the scientific tendency and not the
sign of a culture capable only of unsubstantial metaphysics.’ (Sri Aurobindo, CWSA,
Vol.20, pp. 123–124.)

 

(The author is
the Director of Sri Aurobindo Foundation for Indian Culture, SAFIC, Sri
Aurobindo Society, Pondicherry. He is a well-known Sanskrit scholar and was
awarded the Maharshi Badrayan Vyas Award for Sanskrit in 2012 by the President
of India. Through his pioneering work through Vande Matram Library Trust, an
open-source volunteer-driven project, he has made available authentic English
translations of timeless Sanskrit scriptures of India.)

 



 

 

LEADERSHIP LESSONS FROM A FILM

We are pleased
to announce a bi-monthly series by Mr. V. Shankar, former Managing
Director & CEO of Rallis India Limited. Reflecting the author’s personal
learning and experience over four decades’ association with companies in the
Unilever and Tata Groups, the topics will range across diverse aspects of
business. These will include Strategy and Leadership, touching dimensions of
Assurance, Governance and Excellence as well

 

On a lazy Sunday
afternoon, my better half suggested, ‘Let’s watch FORD vs. FERRARI’.
Usually spot-on with her researched recommendations, I wasn’t surprised; she is
a sports enthusiast, too – I said, ‘Yes, family time!’ Despite being the latest
release, fortunately we got tickets in a multiplex.

 

I was blown away by
the film. It transcends the terrific racing sequences. What probably fascinated
me as well were the leadership lessons that I gleaned from it.

 

CAUTION: Spoilers
Ahead!

 

The key characters
include Henry Ford II, the CEO of Ford Motor Company; Enzo Ferrari,
the founder of Ferrari; Lee Iacocca, Vice-President at Ford; Leo
Beebe, Director, Ford; Carroll Shelby, an automotive designer,
racing driver and founder of Shelby American Inc.; Ken Miles, engineer
and ace racing driver; and Mollie Miles, Ken’s strength and a car
enthusiast.

 

The film is based
on the remarkable true story of the visionary American car designer Carroll
Shelby and the fearless British-born driver Ken Miles who together battled
corporate interference, the laws of physics and their own personal demons to
build a revolutionary race car for Ford Motor Company and take on the
dominating race cars of Enzo Ferrari at the 1966 Le Mans in France.
While watching the film I could connect with many leadership and management
practices I learnt over the years leading businesses as their CEO.

 

Changing
mindsets

Ford car sales were
slowing down and the company wanted to be in the exciting segment targeting the
younger generation. Henry Ford II realises that he should drive his team to
face up to the market reality and challenge the status quo. He addresses
the workmen and communicates the message in a direct, powerful manner.

 

(1) Ford II walks
up to the factory floor and does not call everyone to a town hall or conference
space. This sudden intervention spurs urgency. Setting is important;

(2) The running
factory is brought to a grinding halt and the consequent silence is deafening.
People get the message what happens if sales do not pick up. Non-verbal
communication;

(3) Ford II invites
every employee to come up with ideas. In fact, he says, don’t come back to work
if you haven’t any. Instilling ownership in every person to tackle an
enterprise-wide issue is important. Engage the people.

 

Ear to the ground and align strategy to customer expectations

Iacocca presents a
searching market analysis on what the auto industry wanted and customer
expectations building up to that. He highlights the need to build a different
category of cars, which was not the core competence of Ford. Tracking and
recognising environment trends on changing customer tastes and market behaviour
is crucial to building company strategy and competence.

 

Collaborations,
a way of life

Iacocca calls out
the humbling fact that Ford Motor Company is not capable of manufacturing high
speed cars in the short term. It will take a huge toll of resources and quite a
while – but time is of the essence. The company made a decision to collaborate with
or acquire Ferrari who specialised in this segment for making a jump start. ‘Not
invented here’ mind-set hinders progress.

 

Know the
opposite party

Ford II made an
offer to buy Ferrari and its fleet of race cars in 1963. Iacocca and team
negotiating with Enzo Ferrari did a good job navigating through the proposal.
All looked good, when Ferrari after perusal of the agreement asked a question,
‘Will I have control over the racing team?’ Ford said no, and that turned out to be a deal breaker. Ferrari leveraged this
opportunity and got a better deal with Fiat while retaining its right on the
racing team! For successful negotiations, it is important to study the rival
and know where to draw the line.

 

Challenge the status quo

Ford II takes head-on the challenge of Enzo Ferrari and vows to win the 24
Hours of Le Mans sports car race considered one of the most
prestigious automobile races in the world, which Ferrari won for five
consecutive years. Time was short and so he wanted the best resource on the
job. In came Carroll Shelby. Ford not only contracted Shelby American Inc. the
task of building GT40 and winning Le Mans, but also ensured that the
bureaucracy would not come in the way of his achieving this goal. To bring
about a disruptive change, it is essential to restructure, reconfigure and
realign practices.

 

Avert personal biases

Leo Beebe is given the responsibility of the Le Mans project. He
disliked Ken Miles despite being told that Miles is an outstanding driver. He
believed that Miles was not in Ford’s league. Beebe decided to keep Miles out
and Ford lost the race in 1964. How do you diminish subjectivity in
decisions, a key question?

 

Knowing competition and rules of the
game is paramount

Halfway through the race, the brakes give way and the Ford car gets into
the pit for replacing brakes. The competitors challenge this as breach of
rules. Without a change in the brakes, Ford will buckle up. The Ford team turns
the table by throwing the rule book back quoting clauses which do not prohibit
brake change. It goes through. Be on top of it – know your onions.

 

Passion, the Brahmastra

Passion is the sine qua non to success. Enzo Ferrari had a passion
for race cars and created a world-class company envied on this score. What
propelled Ford, too, was the fury to have supremacy of the market. This drove
him to create Ford cars which could be synonymous with race cars. It became his
obsession as he proclaims, ‘Let’s bury Ferrari at Le Mans.’ Ken Miles
was mad about speed cars and he had a fierce addiction to racing cars. Passion
is a core component for unrelenting progress.

 

Trust, the touchstone to winning

Caroll Shelby had immense trust in Ken Miles as a racing driver. His
trust was so unshakeable that he staked his entire company to Ford in return
for onboarding Miles as the racing driver. In a similar vein, Iacocca reposes
trust in Shelby designing the right car for Ford to win the race. Mollie had
unstinted support for Ken given her huge respect and trust in Ken as an ace
racer. Trust, integral to winning.

 

Finally, you can’t win them all but…
keep going relentlessly

As Le Mans 1966 race nears its end, only Ford cars remained,
signalling a clear victory for the company. But rather than having one winner,
Beebe asks the cars to cross the finish line simultaneously to create a
momentous event for Ford. This essentially forces Ken Miles to lose the race he
had positively won. When the winner was announced, it was a blow to Miles, who
didn’t emerge as the winning driver due to a technicality, despite his car
being the fastest. He sacrificed personal glory for the larger collective goal.
Hiding his profound disappointment, Miles holds his head high and says to
Shelby, ‘You kept your promise. I’m happy you gave me the chance to
participate’. I was moved by Ken’s tremendous character. He really enjoyed what
he did! Be a sport.

 

Ford won Le Mans
consecutively in 1966, 1967, 1968 and 1969.  

 

IS IT FAIR TO MAKE OBTAINING VALID TDS CREDITS TEDIOUS?

BACKGROUND

Getting credit for TDS has become a prickly
point in many of the intimations issued u/s 143(1) of the Income tax Act, 1961
and even in the case of assessments. The Government has tried to automate the
process, which was expected to simplify the grant of credit for TDS and issue
of refunds. However, the computerised system is unable to solve certain issues
to the required extent, which gives a substantial headache to the assessee. She
needs to tackle the demands that are created due to non-grant of correct credit
of the TDS entitlement or issue of incorrect refunds. The process becomes more
complicated, especially because the assessee has to deal with a Centralised
Processing Centre (CPC) which does not entertain any human interaction!

 

Some of the major issues faced by an
assessee in respect of TDS credit are as follows:

 

Non-payment of TDS by the deductor to the
Government or non-filing or incorrect filing of relevant TDS return by him is a
major problem.

 

A different system of accounting followed by
the deductee and the deductor, resulting in a different year of deduction by
the deductor and the claim of TDS by the deductee, is another one.

 

Statutory postponement of claim of TDS as
per Rule 37BA of Income-tax Rules, due to which TDS is not allowed to be claimed
unless the relevant income is offered to tax by an assessee. In many cases this
results in non-grant of TDS credit to the assessee in the year of such claim.

 

Deduction and payment of TDS being made in a
subsequent year by the deductor as compared to the year of accrual of the
relevant income as per the accounting system followed by the deductee, more
often than not results in deprival of TDS credit to the deductee in the
relevant year.

 

WHY IS IT UNFAIR?

After TDS has been deducted, the deductee
remains at the mercy of the deductor for securing the credit for the same. If
the deductor does not pay the TDS or file the relevant return, or makes
mistakes in the return affecting the deductee, the deductee can suffer
financial loss as well as hardship in respect of his own tax liability. If such
TDS credit is not granted, he will not only have to pay the tax but also pay
interest for no fault of his.

 

The return of income has provided for
stating the following details:

 

(i) Brought forward TDS from
the previous years;

(ii) Credit of TDS granted in
Form 26AS for the
current year;

(iii) TDS claimed during the current year;

(iv) TDS carried forward to the next year.

 

However, the intimations received from CPC
u/s 143(1) in many cases are not able to auto-fetch the correct TDS entitlement
of the assessee for the year. The credit given is either less or equal to
the TDS claimed by the assessee. There is no mechanism to understand which TDS
credit claim has not been accepted by the CPC.

 

When the tax is recovered by the Government
on behalf of the assessee as TDS, it may not be fair not to grant credit of the
same for the year on the ground that the relevant income is not offered to tax
in the said year. Deduction of TDS is a process of payment of tax on behalf of
the deductee and it need not be connected with the declaration of corresponding
income by the deductee as the same is declared as per the facts of the case and
the governing law. Declaration of relevant income for the claim of credit of
the relevant TDS may not be fair to the assessee, though it is in favour of the
Revenue. Lest we forget, TDS is primarily a mechanism for collection of tax
at source and not a mechanism for controlling avoidance of tax.

 

Is it not fair to grant the credit of the
TDS to an assessee for the year in which the relevant income is offered to tax
by him, irrespective of the fact that the TDS is paid by the deductor in a
subsequent financial year? This is so, especially in the light of the fact that
the TDS credit is not granted when the relevant income is not offered to tax in
the year in which the TDS is deducted.

 

The TDS
provisions take away the right of the deductee to recover the amount of TDS
from the deductor. Is
it not fair to grant him the credit of the tax because his recourse to the said
amount is substantially weakened, if not lost? This is more so as Government
has full right and effective means to recover the TDS amount from the deductor.

 

SOLUTION

The credit of
tax deductible should be granted to the deductee once the deductor deducts the
same, irrespective of the payment of the same by the deductor or filing of the
relevant TDS return by him. Onus of proof should be transferred to the deductor
or Government which, under law, requires the deductor to make that deduction.

 

Credit of the tax deductible at source may
be granted in the year in which the relevant income is offered to tax, even if
the relevant tax is not deducted in that year but deducted in a later year by
the deductor.

 

The credit of the TDS may be granted even if
it is not appearing in Form 26AS, when the assessee can submit the proof of
deduction by the deductor; this is because Form 26AS is not generated out of
any action of the deductee. It only reflects third-party data. A
technology-driven mechanism should be rolled out by the income tax department
to deal with the mismatch.

 

The credit of the TDS may be granted in the
year of deduction, irrespective of whether or not the relevant income is liable
to be offered to tax for that year. Rule 37BA grants credit of TDS provided the
corresponding income is declared in the return of income of the year in which
the TDS is claimed.

 

This has made the process of claiming TDS
cumbersome and it also results in denial of credit by CPC in many cases. It may
be desirable to do away with the Rule to grant credit in the year in which tax
is deducted. This will make obtaining legitimate TDS credit less tedious and
fair for the deductee.  

 

 

 

 

Brexit- A Few Thoughts

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Query:
Why Britain separated from EU? What are its implications on – Britain, EU, and on India.

I submit my views.

Summary:
Britain is already on a downward slide. By exiting from European Union, it has hastened its fall. It is a non-event for rest of the world. Unless…the Britishers wake up and put their act together.

There is nothing unique in Britain’s tendency to bring harm upon itself. India has done it repeatedly. US is doing it right now very seriously.

1. Details.
History is Process Driven :
In studying human history, we tend to look at events. This is micro view. It would be better to look at the whole process that has resulted into the event; and then see:

(i) What caused the event;
(ii) If the process continues, what can be the consequences; and
(iii) If the process stops or reverses itself, what can be the consequences.

For this we also have to consider the human psychology, and the laws of philosophy. Realise that the process itself consists of several cycles – some virtuous cycles and some vicious cycles. The cycles keep changing in several manners – speed, intensity, direction etc. The interaction of all these cycles produces several events. We notice some.

This may be the practical Macro view, encompassing more than what the economists call a “Macro View”.

2. The British Process of Exit:
2.1 The Britishers left EU because, they still believe – majority still believes – that they are superior to rest of the world. (This is a universal human weakness). And their currency – Pound sterling is the best currency. They cannot be subordinate to anyone. EU was perceived as – making them lose their sovereignty and hence unacceptable. This was the first cause.

2.2 British economy is downhill. There is unemployment. The American economic crisis of the year 2008, has only exacerbated the British economic crisis. All the supply of additional money (Bail outs & Quantitative Easing) has not lifted the economy. People who are unemployed are dissatisfied with their own Government; EU Government and with many other causes that they can identify. After changing the British Governments, economy has not improved. So what do you do? Can’t change EU Government. So leave EU.

2.3 The U.K. current account deficit at 7% is an all-time high. With Brexit this deficit is likely to increase. This will devalue the sterling pound further. However, some believe it is good for Britain. Hence leave EU.

2.4 Despite the fact that British economy is down, the perception of majority of Britishers is that EU is dysfunctional and is a sinking ship. So leave EU.

2.5 The EU policy is that any citizen of EU can move anywhere within EU and can settle down anywhere that he likes. People from Eastern Europe and many countries where economy is far worse than in UK, did migrate into the UK and started working there for a lower pay. This was perceived as causing unemployment amongst the Britishers. This perception ignored the fact that many Britishers live in EU.

2.6 The Syrian refugee crisis exacerbated the fear of unemployment. Sheer number of refugees, and the fact that almost all of them were Muslims, made them unacceptable. And then media publicized news that the refugees were raping European women, terrorists enter Europe with refugees etc. These are big reasons for making refugees unacceptable. But refugees cannot be prevented from entering Britain as long as Britain is part of EU. So leave EU.

Remember the year 1971 when more than a crore of Bangladeshi refugees came into India. Western World advised India to accept them on humanitarian grounds. The refugees are still in India. At Wadala – Antop Hill, there is a whole area known as Bangladeshi Colony. This is just one of the areas spread all over India.

Also note that the USA – which is at the root of the Syrian crisis is not affected by the refugee crisis.

2.7 Then came a sheer coincidence. Cameron made a promise in his election campaign that he will call for a referendum – ‘whether UK should continue in the EU or not’. Having made the promise, when he won election, he was duty bound to call for the referendum. Cameron himself believed that UK should continue with the EU. He had made the promise just to get more votes. If no referendum was called, there would be no exit. But the referendum was called and there is BREXIT.

There were people who were dissatisfied with the EU for psychological reasons. Economics & Geopolitics were not on their mind. They seized the opportunity, canvassed heavily for exit. Most Britishers do not understand Global politics & economics. They only know whether they or their close ones have lost their jobs. People canvassing for Brexit also did not expect a win. When they won the referendum, they were shocked and went in the background.

3. Impact:
3.1 “United we stand & divided we fall” is understood by all. However, this is practised by few. European Union together is the largest economy. It can influence global politics and even challenge US influence. When one unit out of the Union separates, the strength of the Union certainly goes down. Hence, to that extent EU will suffer. To that extent, US might be happy.

3.2 Culturally and psychologically, Britain and Europe have always considered themselves separate and different. British ego increased and sharpened that separation.

However, the irony is that Britain is seeking to delay the exit whereas EU is working for an early exit.

3.3 Also, Britain has no strong leader. It is not in a position to impact world sentiment, leave aside world economics and politics. Its own economy is in doldrums. By exiting EU, worst sufferer will be UK. Pound sterling has already lost 10% of its value since the exit vote making import of raw materials and consumables expensive. This increases both the cost of production and cost of living – impacting industry, jobs and the common Britisher. Scotland and Ireland are reviewing their relationship with Britain.

3.4 If we consider the theory of “Butterfly Effect”, everything affects everything. There will be some impact on India as our exports to UK will become expensive. But the impact will be so small that does not merit discussion. Because of Brexit Netherlands, one of EU’s founding members will call for a UK like referendum and Hungary’s forthcoming October referendum will be on EU migrant policy. Mr. Geert Wilders leader of the Party for Freedom of Netherlands in the party’s manifesto has pledged to withdraw from EU. As opposed to this Germany is working for ?better Europe’ and not `more Europe’. Despite these developments E.U. will still be the second largest economy. Hence I am of the opinion that there will be little impact on world economy.

4. Principles of analysis :
Considering an event and then trying to project future events and consequences – amounts to ignoring an important principle of analysis. Human beings are an important cause of all the cycles and the total process. After the event, they are not going to sleep. They will act. How they will act will affect the cycles and hence future course of events. How humans will act in future is a difficult matter to project and I cannot cover it in this brief article. Hence my view: Future was always unpredictable, and will remain unpredictable and

‘Brexit is a non-event’.

Practice – A “True And Fair” Choice for A Fresh Chartered Accountant in Current Times?

1.    Introduction

A Chartered Accountant reaches a major crossroad of his life when he is qualifies and has to decide between practice and service. Unfortunately, in recent times, from a majority of the persons qualifying opt for service in industry or the Big 4 as their first choice and very rarely choose practice as a career. The Institute of Chartered Accountants (ICAI) statistics reflect the number for associate members who are in full time practice at 46,308 out of total 171,357 CA’s i.e. 27%.

2.    Probable reasons for choosing employment over practice

This trend is also evident from my personal experience:

(a)    Out of 25 odd aspiring CA’s in my CA group of 1999, it is sad to note that I am the only one who has opted for independent practice. There are of course some who are with the profession as Big 4 employees, but a majority is with the corporate sector.

(b)    Only a couple of trainees have opted for practice out of approx. 50 odd trainees trained by our firm in the last 14 years.

(c)    On the personal front as well my Chartered Accountant sibling has opted to make a career in the Big 4 and has never shown interest in practice.

On the other hand, the global trends as reflected in June 2015 by the International Federation of Accountants (IFAC) pegs the number of accountants in public practice at 45.1%. This brings me to the moot point on why are the statistics of qualified CA’s opting for practice in India so low as compared to global norms? The reasons for not opting for practice, as a career choice may be attributable to the challenges faced by a CA practitioner: –

(a)    Lower earnings in the initial struggle period of practice as against an assured fixed pay package from day one of employment
(b)    No readymade post-retirement benefits in individual practice for the practitioners as against those in employment where the employer provides for post -retirement employee benefit plans.

(c)    Need to operate from home until one can afford to buy/lease an office as against in employment where you can work with the best infrastructure and state- of -the-art facilities.

(d)    No structured career path vs. a structured career path with a fast track plan in place.

(e)    Little travel opportunity vs. attractive global business trips at the employer’s cost.

(f)     Networking for developing good contacts, identifying mentors etc. is currently on limited and on a trial and error basis since it is random, unstructured and luck also plays a dominant role since it is not always possible to be at the right place at the right time. (I am not referring to networking as envisaged by the ICAI which does not seem to have taken off).

(g)  Difficulty in retaining good staff who trains with the firm but leave for greener pastures elsewhere.

(h)  In recent years, it is becoming increasingly difficult for the smaller firms to get the reasonably priced trainees, which has resulted in their costing being thrown off gear due to the need to opt for more expensive semi qualified staff.

(i)    The clients in India are also extremely price sensitive and generally resist increase in payments by CA practitioners. This results in many of the smaller CA firms continuing to accept lower fees from their clients out of insecurity and fear of losing clients.     
(j)    The general public perception is that a good CA is one who is good in “managing” client’s issues with the various government authorities. They feel that generally all CA’s earn substantial portion of their income from such malpractices. This though only a perception unnecessarily taints the entire profession, which can otherwise play an important role in the country’s economic growth
by partnering and supporting business by leveraging their expertise/ knowledge in the right and ethical manner.

(k)    There is also the challenge of losing work due to technological development. For instance, many corporate players have created websites providing online assistance for filing Income tax returns, Company formation etc., at a fraction of a cost charged by CA firms. There is a strong possibility that CA practitioners will lose their staple practice if they do not carve a niche for themselves.

(l)    It is widely known that almost 70% of the practitioners are sole proprietors and there is a general aversion to partnering with others possibly due to lack of formal forums / guidance to network, distrust for peers and non-willingness to trade off size with independence.  The proliferation of smaller sole proprietary set ups may be the reason why there is a mad scramble to get work at any cost, resulting in undercutting of prices.  If the proprietary firms join hands to form bigger set ups, then the fee structure would definitely be more competitive and fair for CA’s.

(m)    Since I have joined practice, there has been a major overhaul of laws, starting with replacement of FERA with FEMA, introduction of Service tax, introduction of new corporate laws, the recently introduced RERA and Benami Prohibition Act, the proposed introduction of GST etc.  It has become increasingly necessary for the practitioners to quickly unlearn the old and learn the new in order to stay updated and relevant.

(n)     Due to the superior technology adopted by various government departments and more integration between databases of different government departments, the defaults made by tax filers are detected more briskly and penalty orders issued immediately. It has become most important for CA’s to regularly educate and guide their clients to be compliant in all respects so that they are safeguarded from such penalties.

(o)     Recently, there have been news of the database of some CA firms being hacked resulting in them losing access to their own database. This has made it extremely important for the firm/partners to take professional help in ensuring the firm network and databases are secured and regularly backed up.

Therefore, practice is not for the weak-hearted especially in larger cities where the competition is cut throat and one has to be constantly alert to opportunity and reinvent the wheel to survive.  

3.    Meeting the challenge and the way forward- my personal experience

In my initial years of practice, there was no conscious thought given to actively developing the practice. With a ready-made practice, which I became partner in, I had thought that I just need to stick around and learn the tricks of the trade. I spent the maximum time and energy in execution mode i.e. in interacting with clients, execution of jobs on hand and updating my knowledge and skill sets. Our firm never had any growth plan or strategy and we generally trudged along doing our daily jobs, like a rudderless ship. I remember not knowing how much would be our firm’s turnover and profitability at the end of the year. The big Surprise would be revealed only after all accounts were updated at the time of tax return deadline in September. Our outstanding fees were also averaging at 8 months since most clients would pay before the next audit/ tax filing due to lack of regular follow up on our part. We would randomly provide annual increments to staff including performance incentives, even before our financial position was known to us. This coupled with the lack of special efforts to add to our top line, slowly resulted in the shrinkage of our bottom line. We soon realised such an approach was not sustainable since although we were successful in keeping our staff happy, it was at the expense of the firm’s long-term prospects.  

Ever since, we have started focusing our energies on steadily developing the practice and have changed tracks to introduce the following professional initiatives, which has definitely helped set the firm into “growth mode”. These are the steps we have taken :

(a)    It is very important to do an honest SWOT analysis of your firm, and align your firm’s growth plan to its strengths. It is also important for the firm partners to take into consideration their areas of interest so as to have a well-defined firm strategy.  We have thus identified newer areas of practice, identified industries or service lines to focus upon etc., and have devised a growth strategy for the firm covering 3 years, wherein the aim is for the newer areas of practice to contribute more than the traditional areas of practice, to the topline.

(b)    We have also introduced an annual process of budgeting firm performance in March every year, taking into consideration the previous year’s performance.  We regularly monitor firm performance against targets set at a monthly frequency such that the firm’s performance is known to us before we head into the 4th quarter.

(c)    We also conduct Monthly Outstanding reviews, to ensure the receivables do not become sticky thereby adversely impact our cash flows. We have also introduced a system of sending follow up emails for the slow moving debts and a stop service policy in case the dues go beyond 6 months, so that the clients do not take us for granted.

(d)    We have introduced the policy to periodically review rates charged to clients per service line and to formally communicate any increase vide formal communication so that the client understands that it would be the norm rather than an exception.  We have also fixed minimum thresholds for our fees, below which we would not accept/continue the work. This has helped in weeding out clients who do not appreciate your services and unnecessarily object to fee increase.

(e ) We have also introduced the practice of issuing an engagement letter for the new jobs.  This has ensured that the terms and conditions on which we undertake the assignment are well spelt out at the start and accepted in writing by the client. There is also a policy to collect the mandate fee of 50% of the fee for walk- in clients, who have not been referred by our contacts.

(f ) For the purpose of continuously engaging with the clients, we have started the practice of meeting key clients identified by the firm at the start of the year, at regular intervals. We also send regular mailers to all clients containing interesting articles, recent key changes in law etc.

(g) Managing the IT systems to ensure data is kept secure and is regularly backed up, software bought are updated regularly, business continuity planning etc. is especially important in the current world, where the technology drives most business.  We have outsourced the IT systems to a professional to manage the IT risks.

(h) In recent times we have carefully developed a web presence and we ensure that it is regularly reviewed and updated with latest details with respect to firm Partners, offerings etc.   

(i)    For a small enterprise, where the partners are involved in execution, it is very challenging to spend time on networking. However, it is extremely important to slot time for networking into your calendar since unless you continuously expose yourself further to newer people/corporates, the opportunities would not be so forthcoming.  For this reason, we have devised internal targets to ensure each partner meets two new people per week.

(j)     We have also introduced the practice of determining key result areas (KRA’s) for the key staff at the start of the year, so that the incentives paid are aligned to firm performance and the individual’s achievement of KRA’s.

(k) We have also focused on creating standardised processes and procedures and regularly training the staff in this regard, which would help the firm in scaling up through creation of efficiencies.

(l)     Since the results of the trainees in our firm in recent years have not been good, we have started regular in house trainings for the trainees and also encourage them to attend relevant programs conducted by
the ICAI.

(m) We also have devised a system of weekly trackers for the staff, wherein we allocate works to staff and also regularly monitor the status of the works.  

(n)    It is possible that to many readers the steps that we have taken seem elementary, but my experience is that despite this knowledge of what is necessary,  many of my contemporaries do not put it  into action.

4.    Expectations from Institutions and peers

Although in recent years, ICAI & BCAS have been very active in the development and marketing of the profession, and have taken noteworthy initiatives, there is yet scope
to do more to alleviate the challenges faced by the current practitioners and help practice become the top career choice:

(a)    Although there are myriad seminars for developing knowledge on various laws, there are very limited seminars/courses focusing on developing public speaking, presentation skills and other soft skills that are important for a practitioner.  The professional institutes should consider a tie-up with premier Management Institutes for creating specialised communication courses for CA’s, which may help them develop their communication/ presentation skills.

(b)    Currently, there are multiple study circles where the focus is generally on knowledge sharing, but there could be groups regularly meeting with a specific focus on practice management to share specific practice experiences, network and encourage tie-ups/ partnerships. The practice experience shared could cover topics relevant to practitioners like draft of a partnership agreement /MOU, recent tools available for CA office management, etc.

(c)    Like the ICAI has created separate portals for WOMEN CA, professional development etc. ICAI could create a portal for the Corporates to post their specific requirements for audit/ special assignments etc.  The SME practitioners could log in and regularly check for such requirements and send their best quotation. The regulatory framework of the ICAI should, be such that this becomes a possibility.

(d)    There is a lot of literature available in the market including self-help books focusing on individual practitioners.  Regular columns may be introduced in the publications to recommend and review these books, which may help the practitioners who are avid readers.

e)    Senior members in practice in the bigger Indian firms may be encouraged to share their experiences in practice and provide insights into practice development. For instance, M/s ABC wishes to have an office in Goa, but does not know how to go about the same and build a presence. The only way the firm would learn is by speaking to other firms who have successfully done it. I am aware that BCAS has such a program but these type of events need to increase. If there were regular columns/articles in the professional magazines wherein the partners of the larger firms would share their experiences on how they have expanded their reach, others could benefit from it.

(f)    Another effort lacking is for formal mentoring programs to be introduced for younger members, so they can gain considerably from the experience of the seniors in the profession. Here again BCAS has such a program but it needs to be publicised much more.

(g)    Although there is a portal for registration of articled trainees which firms can use for recruitment of trainees, the same needs to be improved since the information available therein as regards articled trainees is not updated promptly, which unnecessary results in waste of time.

Conclusion
The thought process behind penning this article is for the following stakeholders in the profession: –

(a)   For the new practitioners to learn from my experience, to get out of the execution mode, view the big picture and to consciously take steps to grow their firm to its full potential.

(b)     For the professional bodies of our erudite profession to further support and empower practitioners so that the newly qualified CA’s seriously consider practice as a “true and fair” choice rather than join the service bandwagon, which is the trend in recent years.

INTEREST RATES – AN INSIGHT

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Introduction
Interest can be described as the price demanded by the lender from a borrower for the use of the lender’s money. Though, in exceptional circumstances, interest can be agreed as a fixed amount, irrespective of the principal invested and the period for which it is invested; generally interest is agreed at a particular rate for an agreed period. Interest is mostly expressed in terms of annualized percentage, which is called as rate of interest. Interest can be termed as fees paid by a borrower to a lender on borrowed amount as compensation for foregoing the opportunity of earning income or utilizing it otherwise. In simple terms, interest for a lender is a kind of rent for money. For a commercial borrower, it is a cost of capital for his business. For a personal borrower, it is a cost of preponing consumption.

Generally, Interest is paid at the agreed rate and it is payable periodically, by the lender to the borrower. Unless otherwise agreed upon, interest accrues to the borrower on a daily basis. If the interest amount is not paid to the lender, it can also be compounded at the agreed rate. Though interest can accrue on a time proportionate basis, the lenders and borrowers can agree to settle the same after a particular period, on compounded basis. Compounding of interest envisages not only paying interest on principal borrowed but also paying interest on unpaid accrued interest, which remains with the borrower for the contracted time. When interest is not compounded, it is called simple interest.

Major factors affecting interest rates
The major factors having an impact on the interest rates in an economy are as follows.

Monetary policy
A central bank in the country controls money supply in its economy through its monetary policy. If it loosens the policy, it expands money supply, thereby increasing liquidity. Higher liquidity results in a higher supply of credit. If the demand for credit is not matching with the supply, the interest rates tend to fall. The policy measure of increase in money supply can push economic growth but can result in higher inflation. When the central bank tightens the money policy, interest rates tend to rise in the economy due to reduced supply of credit. Such a move may help in reducing inflation. The central bank has to do a balancing act. The change in repo rates can influence the rate of interest in an economy and they have positive co-relation.

The growth rate
High growth rate in an economy may increase the demand for credit thereby causing an upward pressure on interest rates. On the contrary, slowing growth rate reduces the need for credit, thereby having a negative pressure on the interest rate. When an economy is growing at a normal pace, the long term interest rates can remain stable, unless intervened by the Central bank. Generally, the Central bank does not allow pure economic forces to play and while the economy is growing, it may try to control the interest rate by measures such as adjustment of CRR, SLR etc.

Liquidity
The global liquidity levels at a given time as well as the local liquidity in the economy of a country can impact interest rates therein. When liquidity is high, the interest rate can remain low unless there is some other pressure of factors such as slow economic growth, high inflation, civil unrest etc. Lower liquidity will tend to increase the cost of capital, which is given in the form of interest. Excess liquidity can give impetus to carry trade based on currency movements, if the interest rates are low. In such a transaction, money is borrowed in a currency in which interest rates are low and it is lent at high interest rate in some other currency, mostly in some other country. In an economy, in which money is flowing in due to carry trade, the interest rates tend to soften. If they soften beyond a limit so as not to remain attractive, it may result in reversal of carry trade. Likewise, if the interest rates in the currency of the country from where the carry trade has originated goes up, the funds may flow back to the country of that currency, unwinding the carry trade.

Uncertainty in Environment
When there is economic or political uncertainty in a country, the risk of investment increases resulting in hardening of interest rates in its economy. More the risk the lender needs to take, he demands higher rate of interest on the capital lent. When a country is going through an economic turmoil, the interest rates tend to harden substantially, not only due to risk of capital but increase in risk of doing business, which may result in reduced probability of getting the principal back, as per the agreed terms. Similarly, due to political crisis or situations of war or civil unrest, the interest rates may harden due to uncertainty, higher risks, risk to the security etc. Lenders are risk averse. More the risk, they seek more returns and so higher rate of interest.

Inflation
Interest rates in a currency have a positive correlation with the inflation of the home economy of the currency. If inflation is high in a country, it tends to increase interest rates in that economy. In an economy with high inflation, the reward required for capital borrowed also has to compensate the lender adequately for reducing the purchasing power of the money lent over the term of the loan. In an economy wherein inflation is low, interest rates tend to seek lower levels. Generally in an economy, over a long period, interest rates are higher than the inflation. The interest rates, net of taxes, tend to be atleast equal to inflation. Otherwise, person parting with money and taking risks of lending is not benefitted at all as his purchasing power may go down over a period even after receiving interest.

Other factors
Other than the economic factors mentioned above, the following factors specific to the transaction of lending can affect interest rates.

Type, cover and quality of security
Better the quality of security; lower can be the rate of interest. Security, which can be easily encashed makes lender more comfortable and he can offer better terms. If the structure of security is complex and it is not easily encashable or if the lender may have to incur substantial cost to encash the security, he may claim a more aggressive rate of interest from the borrower. Further, if the security cover of the loan is higher, the rate of interest can be lower. Security cover is the value of security as compared to the amount lent and it is expressed in terms of number of times of a loan. Higher the security cover, more the safety of the lender and therefore he may soften the interest rate. Quality of security can also affect the interest rate. A security with stable valuation is preferred by the lenders. The security which fluctuates substantially in value may result in lender asking for a larger cover as well as higher rate of interest due to risk of the security.

Tenure of loan
Longer the loan period, lower could be the rate of interest. A lender takes full risk of the capital lent as soon as he parts with the money. If tenure of loan is very short, the total interest earned by the lender is quite small as compared to the money risked by him. In such a case the lender has to take the full risk of the money lent, till the money is repaid and the reward remains disproportionately meagre. Therefore, for short term loans, higher rate of interest is charged. However, in case of very long term loans, interest rates can be higher than the medium term loans. In such loans, the risk increases beyond the immediately foreseeable future and therefore the lender may charge a higher rate of interest. Such loans are also subject to the vagaries of market rate of interest. In fixed interest rate transactions, the yield to maturity of a loan remains constant but its market value may change. If the interest rates in an economy go up, its market value comes down and vice-versa. This happens more so in the case of loans issued in the form of bonds and debentures, which are listed for trading or otherwise tradable.

End use of the funds
If the end use of the fund is acquisition of a risky asset, then interest rates tend to be higher. A lender will lend to a business investing in manufacturing at lower rates than the business investing in research of technology as the risk of the latter is higher. If the end use is purchase of fixed assets which can be an additional security for the loan, the borrower may get softer terms. Therefore working capital loans generally carry a tad higher rate of interest than term loans given for acquisition of fixed assets.

Credit worthiness of the borrower
The credit worthiness of a borrower is based on his reputation, his net worth as well as his liquidity. The industry in which the borrower operates also makes an effect on his creditworthiness at a particular time.

A borrower operating in an industry which is not doing well has higher risk and therefore interest rate charged to him may be higher. The overall creditworthiness of a party can be expressed in its credit rating as certified by a reputed rating organisation. Better the credit rating of a borrower, lower the interest rate charged to him. Low credit rating can result in higher rate of interest being demanded and in some cases; the borrower may decide against lending or may recall the loan, if the terms so permit. The rating indicates the ability of the business to pay to creditors at a given time and it does not reflect integrity or other finer virtues of a borrower. In case of small borrowers where the credit ratings are not available, various ratios of the financial position of the borrower can be considered by the lender to determine the creditworthiness and therefore the rate of interest to be charged.

Industry of the borrower
A lender can charge differential rate of interest based on the trade or industry to which the borrower belongs to. The industry with longer gestation periods may be charged higher rate of interest as compared to shorter gestation periods. The industry which has seasonal demand only in a particular part of the year may be lent at a higher rate by a lender as compared to the business in an industry which is not seasonal.

Negative interest
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Interest being a type of fee paid by a borrower to the lender, it always used to be an income of the lender and an expense for the borrower. However, modern economy has been posing newer challenges to the world, which are dislocating the old beliefs and destroying the old theories. After the recent recession of 2009, the world has been finding it very difficult to bring economies of many developed countries out of low growth / stagnation. To give impetus to investment as well as expenditure, the developed economies encouraged borrowing. The interest rate is the main hurdle which reduces demand for credit and the Central Banks of many developed countries kept on reducing the benchmark interest rates in their respective economies to encourage the borrowers. The interest rates in developed economies like the US, Euro Zone, UK etc., were gradually reduced to near zero levels a few years back. Though some economies like the US could recover due to the cheap credit doled out, the economies of Euro Zone and Japan have continued their stagnation. A few months back, to give push to growth, the European Central Bank reduced its policy rate of interest below zero percent, which means the lender will have to pay interest to the borrower for keeping his deposits. Since January 2016, even Japan adopted this policy of negative interest rate. Some countries like Sweden, Denmark and Switzerland have also adopted negative interest rates. Though this phenomenon does not appear logical, as central banks could dictate their terms in their respective economies, this policy has been adopted. This policy punishes the banks which hold cash instead of extending loans to businesses or to other weaker lenders to lend further. As an effect of negative rates, trillions of Dollars worth Government Bonds worldwide are now offering yields below zero meaning that the investors buying the bonds and holding them to maturity will not get their full money back. As of now, many banks are reluctant to pass negative rate of interest to their customers, due to fear of losing them; although it is applicable for inter-bank borrowings. However, sooner than later, they will have to fall in line and start charging their customers.

Major effects of low interest rates –

1. A lender gets less income thereby affecting his/its income and his/its purchasing power to that extent.

2. Lower interest rates reduce the income in hands of many investors investing in deposits and fixed income earning securities, thereby reducing their taxable income and as an effect, it reduces the tax payment by the subjects. Lower interest rates can create a shortfall in tax collection, unless budgets are accordingly adjusted.

3. Citizens and especially senior citizens living on the interest of their investments have lesser interest income, which reduces their purchasing power. Low interest rates can affect their ability to buy necessities and medicines, which can hamper their welfare.

4. Charities which run their operations out of the income earned from the deposits received from the donors have less income in their hands to use for the purpose of their object and administration. They will have to rely more on the donations which are in nature of current income for their operations.

5. Low interest rates can boost the economy as the entrepreneurs can borrow at cheaper cost for their businesses. It also increases the profit of businesses as interest is one of the major costs.

6. Very low interest rates can spur consumption by way of increased spending as the consumers have less incentive for saving. Increased consumption can boost the economy to an extent but it can hurt a developing economy which is in need of fresh capital.

7. The low interest rates can result in cheaper credit to consumers for buying consumer durables. It may lead to increase in sale of consumer durables such as cars, televisions, electronic gadgets etc., as well as expenditure on holidays and entertainment.

8. Low interest rates may generate a higher demand in an economy thereby increasing economic activity and correspondingly pushing up the growth rate.

9. Lowering interest rates may result in cheaper credit and lesser option for investors to invest their capital, which may result in a rise in stock and property prices in that economy and continuation thereof can create a bubble like situation.

10. When interest rates are low, investors get more desperate to increase their earnings and therefore may patronise riskier class of assets. Over exposure to risky assets is against the interest of investors, as well as the economy.

11. Cheaper credit may push up capital intensive investment replacing labour which over a long period may create less job opportunities and therefore unemployment in an economy.

12. Low interest rates may increase consumerism in a society, which may result in excess personal borrowing by the subjects. If the economy slows down or goes into recession that may hamper the ability of the borrowers to repay the loans, resulting in substantial bad loans thereby derailing the banking system as well as economies. Excessive credit defaults or bankruptcies may result in low morale and low consumer confidence, which may affect the overall health of an economy.

13. Lowering of interest rates can give a boost to corporate profits due to lower expenses, thereby increasing the share prices of the companies, especially those which have large outstanding debt and may trigger a stock market rally. However, the sustenance of the rally is dependent upon the growth of the economy.

14. Lower interest rates give a fillip to the housing sector as a borrower can borrow more amounts with the commitment of the same equated monthly installment (EMI).

15. The fixed deposits and the bond/debenture holders are generally the sufferers in the low interest regime. They can reduce their allocation to this asset class in such a phase. However, lowering interest rates generally result in lowering yield on debt securities which results in increase of bond/debenture prices carrying fixed coupon, which may give some respite to the bond/debenture holders.

16. Low interest rates trigger an increase in appetite of investors for precious metals and precious stones, as low deposit rates can make investors partly shift their asset allocation to this asset class.

17. Reduction of interest rates can cause pressure on the currency of the country as capital may flow out to other countries, where interest rates are higher. However, if the currency of the home country is basically strong and inflation therein is low, then the outflow of currency can get restricted, giving stability to the economy as well as the currency.

On one hand, lower interest rates may generate growth by increasing consumption and investment but on the other hand dampen the growth due to reduction in purchasing power in hands of certain sections of society and institutions, which are dependent on interest income. The final effect depends on the weightage of the respective factors prevailing in that economy.

The Indian scene
India has been struggling to cope with high interest rates prevailing in its economy for many years. One of the major reasons for the same is high inflation prevailing in its economy. In the current global scenario of very low interest rates prevailing in developed economies, this high cost of capital has been hurting Indian businesses. It has slowed down investment activity. Cost of capital being high, it has also affected the cost of production thereby eroding the cost efficiency of the Indian businesses; as compared to many developed economies, in which borrowing costs are negligible. The Government has been very much in favour of reduction of interest rates but the Reserve Bank of India (RBI) had been very cautious as it feared that the reduction may fuel demand push inflation in the economy, already suffering from inflation due to supply side constraints. Over the last few years, systematic efforts have been made to reduce the inflation in the country, especially by strengthening of the supply side, by domestic production as well as imports. The efforts have started yielding results and consumer price inflation (CPI) index has come down from 9.70% in 2008 to 5.72% in 2016 and it is expected to ease further. During the period, the RBI has reduced the benchmark interest rates in the form of Repo rates from 9% in 2008 to 6.50% now; and this is not the end of the reduction process. If the inflation remains in control, as is expected in the near future, the interest rates can further come down. Investors need to align their investment strategies to falling interest rates in the days to come.

India has recently started its journey towards low interest rates and it is likely that on the back of sustained economic growth, the country may continue its journey towards further lowering of the rates, albeit gradually. Many of the developed economies in the world have low interest rates which are sustained for long periods of time. If India continues its growth at the current rate and can control inflation, the interest rates in the economy may gradually reduce. Indian investors as well as consumers are not accustomed to low interest rates. Investors will have to adjust their investment strategies to fit in to the new environment. Senior citizens as well as institutions relying more on interest income for their sustenance will have to realign their consumption / spending patterns. Lowering of interest rates may hit hard this particular section of the society. On the flip side, the businesses will have reasons to cheer due to low interest cost and EMI paying consumers will get delighted.

Conclusion
Interest rate is one of the major tools in the monetary policy of a Central bank. In the recent years, the RBI has made a calibrated use of the same inspite of pressures from various quarters. This has resulted in lowering of inflation in the economy without affecting the growth much. Lowering of interest rates over a period will give great advantage to the Indian economy as costs can go down and become more competitive. This will also support the ‘Make in India’ movement.

Demographic transition-economic effects

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Background
In the 19th century, though the longevity of human beings was low, the world population was growing due to a high birth rate, inadequacy of birth control measures and family planning awareness. Inadequate development of life sciences and life saving drugs kept the death rate also high. Due to malnutrition and insufficient child care, infant mortality was high too. Diseases and epidemics were common and treatment thereof was not adequately effective. As a result, population growth remained under control and nature was keeping its balance. Then emerged an era of inventions across various science streams; and medical science developed rapidly. Research could conquer many of the dreaded diseases such as cholera, plague, small pox, leprosy, tuberculosis etc; which were some of the major causes of shortening of human life expectancy. They were the causes of mass scale deaths. Due to invention of various vaccines, the diseases could be immunized. Many of them could be cured by advanced medicines invented. Quality of healthcare improved and even medical infrastructure advanced significantly. This reduced the large scale human life destruction and life expectancy increased sharply. Currently, the highest life expectancy of 84 years is in Japan.

India and other countries
Similar phenomenon prevailed in India as well though the numbers were poor. The steady rise in the life expectancy rates in India can be visualised by the table below:-

Over the last few decades, some new epidemics/ contagious diseases such as swine flu, bird flu, dengue etc. have emerged causing danger to human life. Death tolls have also increased due to cancer and AIDS. However, modern research has substantially reduced their rigour and it is expected that soon some solutions will be invented to manage them, if not fully overcome them. Even after the emergence of new types of diseases, the life expectancy has increased decade after decade across the world and it is at the highest level as of now. Further, due to consumption of better quality food and water, supported by inventions in medical science, there is every possibility that life expectancy will continue to climb up. Many developed countries have a life expectancy of more than 80 years and even many developing countries have a life expectancy of more than 70 years.

Economic effect of longevity of life
The modern medicines and methods of treatment have increased the life expectancy but the working life of a human being has not increased proportionately. In many countries, on an average, a person starts working at the age of around 20 and retires at the age of around 60. In many developed countries, the working life is longer, and people work till the average age of 65 years. This is on account of shortage of labour and better health conditions due to less polluted environment and better quality food. The life of a human being after retirement, which is generally less productive, is becoming longer due to better life expectancy. Many retired senior citizens, though generally wealthier than others, especially in the developed countries; cannot meaningfully contribute to the GDP of their nation. However, many nations have to incur substantial costs for them by way of provision of social security, pension, free or subsidised medical facilities etc. A human being in a developed nation works and actively contributes to the GDP for about 45 years in his lifetime. With life expectancy advancing above 80 and the retirement age not advancing beyond 65 years, the proportionate working years in the life cycle of a person has reduced. In a country, certain people are not able to work because either they are handicapped or unwell. In many societies, women do not work for commercial consideration and many of them are off work due to pregnancy, child care or family issues. The longer life span of human beings is increasing the percentage of non-working population in many countries and especially in developed countries, which is becoming a matter of concern.

Working Population ratio
The following statistical data can be an eye opener as to what percentage of the population in a country is working to contribute to its GDP. The working population percentage is more in the developed countries, which has less young population as compared to the developing countries.

Developed countries are facing one more problem mainly due to the change in lifestyle emerging from economic development. In the modern developed society, the age for getting married is increasing. The educated new generation is getting married at a much later age than earlier. Many of them even prefer not to get married and stay single. While this is happening, human anatomy has not changed.

The fertile age of females has remained the same and therefore the reproductive years available after late marriage are getting reduced. Further, work related stress is causing frigidity and disorders. This is resulting in birth of less than two children per couple in many developed countries. As a result, the population of developed countries has started reducing. To make the position worse, a larger part of the population is ageing and is not able to contribute to the GDP of their country. The social welfare expenses are on the rise and have become a significant cost in developed economies. The young citizens need to bear a larger portion of the economic burden of the society. This is resulting in increase in taxes and tax rates, increase in borrowings of the nations and slowing down of their economic growth.

Stagnating GDP of developed countries
Japan is one of the major examples of this phenomenon in the world. Over the past 20 years, the population of Japan is not growing much. The life expectancy as well as average age of the Japanese population has increased year after year. The working population in that country is gradually shrinking. In spite of innovation, technology growth and other facilitators; the GDP of the country has stagnated and possibilities of its turnaround are nowhere in sight. A number of economic stimulants have been applied by that country but they are not able to provide the desired results. Inflation has remained very low as the domestic demand is not increasing adequately due to stagnation. Spending capacity of the population remains high but the overall spending is not growing much. Its currency has been gradually strengthening, reducing the competitiveness of its exports. As a result, the economy has stagnated and China has overtaken this economy pushing it to the third place.

Since the last recession in Europe, the developed countries therein are facing problems in gaining growth momentum. Their economies are stagnating and in spite of efforts by the European Central Bank, the required traction is not materialising. Quantitative Easing, which has been successful in reviving the US economy, is being applied in a larger dose in Europe and only time will tell how far can it be effective. The population in the European Union is also aging. The birth rates are low and they are much less than two children per couple. A birth rate of 2.1 per couple is needed to keep the population level intact and the European growth rate of 1.6 per couple can result in substantial reduction of population, unless sizable immigration from other countries is encouraged.

Migration
Due to added longevity, the percentage of working population in many countries in Europe is getting reduced. Though, of late, there is migration from Eastern Europe to the Western European countries, the overall effect is not very significant. Europe is not systematically adding population from countries across the world as is being done by the US, Australia, Canada and New Zealand. For an economy, which has a low or negative population growth, it is desirable to add on young population from other countries, who can keep the demographic balance in the current era of high life expectancy. In the absence of such an induction, the economy can stagnate as has happened in Japan. In this connection, the following tabulated data of various countries in 2013 can be an eye-opener.

After the last recession, the US has performed reasonably well and its turnaround has been one of the fastest amongst the developed countries. One of the reasons for the same is that the country is constantly taking in immigrants from all over the world. The immigrants accepted are mostly highly educated intellectuals. This has kept the country ahead of the rest of the world in research, technology, education and even entrepreneurship. Though the original population is aging, newly added immigrants are keeping the overall demographic balance and therefore the country is expected to remain on the growth path for the years to come.

Chinese Situation

The single child policy per couple, which was adopted in China since 1980, had initially given good dividends. The population pressure on the country has eased over a period of time. The economy grew well for a number of decades and the per capita income kept on rising. The affluence in the Chinese middle class increased substantially and the standard of living improved. However, the Government could have eased the policy atleast after 25 years of its implementation. The continuation of the policy longer has started showing its negative effects. As the birth rates dropped, the working population could not keep pace in the country. If the policy would not have been changed in 2013, it could have resulted in social and economic imbalance. Still, over the years, the low population growth has depleted the potential labour force of the country. It has started increasing the labour cost in China. This can disturb the manufacturing advantage of the country over the rest of the world and can further slowdown its growth rate. This demographic imbalance cannot be cured overnight and the Chinese Government realised the same probably a bit late. Easing of the one child policy will not yield any immediate results. The well educated and rich Chinese population is very likely to have negative growth due to the same syndrome as prevalent in many developed countries of the west. This may cause a serious threat to the Chinese dominance on global mass manufacturing. If balanced corrective actions are not taken by the country, it may even face economic stagnation like Japan after a couple of decades.

The Chinese population is developing one more peculiar problem. The working couples born in the one child policy regime need to take care of four of their aging parents. The Chinese culture being traditional, parents are actively looked after by their children to the best possible extent. The couples are ending up spending their considerable personal time with doctors, in hospitals and at homes of their parents to take care of their health issues. Each of these couples has only one child. The child has four grandparents. Their affection to the child is in a way pampering the child to undesirable levels, spoiling his habits. These children are quite likely to inherit considerable wealth from their parents and four grandparents. This fact makes their future secured but the initiative for hard work is being lost. The new generation in China is more educated and savvy. They are more competitive and ambitious. This has resulted in late marriages and a resultant large number of single population, which may further disturb the demographic balance. The one child policy and the social structure in China have also skewed the demography resulting in a higher male to female ratio, which is not a healthy sign. These developments are likely to affect the Chinese economy and its growth rate in the years to come. The great era of sustained growth may be over for that country mainly due to this demographic imbalance. The economy may continue to slow down causing concerns to it as well as to the overall global growth for the years to come.

Demographic dividend for India

Contrary to most of the other countries of the world, the demography of the Indian population is very much favourable. The current age group of population in India is as under:

It can be observed that India harbours a large young population, which will join the workforce in the next 20 years. India is spending a substantial amount on education and skill development and the allocation is expected to increase in the years to come. Therefore, more and more population joining the workforce will be skilled. India has already acquired a reputation for its ability to deliver high skill services. The Government is stressing on the importance of increase in export-oriented manufacturing in the country. If right types of reforms are carried out, this dream has a potential of materialising into a reality especially as China may be losing its edge. Availability of a large young population, which is undergoing various types of education and skill development, will complement this goal. The young and educated Indians can make the country grow at a faster rate than most of the other countries in the world. The country can even achieve double digit growth in the years to come. Though India had taken a lenient approach over population control which had a negative impact on per capita income and welfare of its subjects, its current demography can pay a rich dividend to the country, over the next couple of decades. That does not mean or imply that India should remain lax about population control. Overpopulation can create lot of negatives for an economy and imbalances which can take a long time to correct. However, the current population status and mix in India, appears to be favourable, as most of the developed world is facing problems of ageing population.

In the next twenty years, the skilled and semi-skilled population joining the workforce will make the GDP of India grow faster and her per capita income can soar. There is a considerable unsatiated demand in the country for goods and services. More money in the hands of the population will boost the demand and result in a robust domestic market. The opportunity is great and it can make India the third largest economy in the world over the next couple of decades. Though the domestic climate is conducive for growth, the future very much depends on Government initiatives. If adequate steps are taken to speed up reforms and controlled capitalism is well supported, a golden era for the country can usher. However, if there is any policy lag, it can result in large unemployed and underfed population. If jobs do not get created at the same speed at which the younger generation is aspiring and joining the workforce, it can create social unrest and economic problems.

Today is the time for great opportunities for India, but it is laden with inherent risk. The Government will need to handle the situation carefully with a result-oriented approach. The next two decades for India can be great and most of us may be fortunate to witness this era.

MEDICAL PROFESSION – YESTERDAY, TODAY AND TOMORROW

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Before birth and even after death, the medical profession remains indispensible to human beings. Pregnancy to death certificate, society needs doctors. Routine health check- up or Illness, both require medical attention. Vaccination of new born to all age group needs helping hands of doctors. Poor and rich cannot escape from the services of the medical profession. No other profession covers such a wide spectrum of services to human life and all strata of the society.

Let us see the evolution of the medical profession. How the profession and services of Yesterday, Today and Tomorrow has influenced YOU and US.

In the last 65 years, medical knowledge and advances have increased by leaps and bounds. Medical profession originally had five specialities – GRASP – Gynaecology, Radiology, Anaesthesia, Surgery and Physicians. With the research and advances, other branches were developed like Paediatrician, Orthopaedic, ENT, Ophthalmology. Advances never came to a halt. System or organ specialisation started. Heart (Cardiology), Kidney (Nephrology), Brain, Alimentary system (Gastrology), etc. Once the branch develops to an extent, surgical advances in these branches also kept up the pace, so we have a Cardiac surgeon, Genito-Urinary surgeon, Neuro surgeon, Gastro and Colon surgeon and so on. Research is mounting at 20 ft. of written volumes per day from the experience, exchange of views, mistakes, complications of the disease, experiments on animals and trial on human beings. All this knowledge has resulted into new branches raising their heads. Doctors have now started specialising in diseases like Diabetes, Thyroid, Aids, Sexually Transmitted Diseases (STD), Infectious diseases, TB, Leprosy, Allergy, Immunology, etc. After system, organ and disease, symptom speciality raised its head. Vertigo, Asthma, Deafness, Obesity, baldness, and unthinkable speciality 50-65 years before like Hair & Scalp, Nail, Veins, Cosmetology and cosmetic surgery, etc. Humans by nature are ambitious, greedy and always looking for new ways to earn. Advances have spread in all the specialities and corresponding Paediatric and infant counterparts of the speciality not only came into existence but are recognised and university degrees are created. Sub-branches in paediatrics have developed into recognised speciality. To name a few, we have paediatric cardiology and surgery, Paediatric neurology and surgery, Paediatric ENT, Ophthalmology, etc. Ooph. Today, we have Red Blood Cell and White Blood Cell specialists. From GRASP during pre and immediate post independence period, fist has opened. The profession has developed into 300 specialities. BUT…What has happened with all these advances? It is not the system or organ that was snatched, but the living human being got divided and dissected.

Knowledge of each specialist and super specialist became restricted to his own field. As a practicing ENT specialist, my knowledge of dermatology and opthalmology shrunk to an extent that I am afraid of diagnosing a simple ailment of another speciality. So is the plight of all other specialists. We have become Kupmanduk (Frog in the well – person with limited vision).

Every family needs a doctor for routine health chores viz: Routine medicine, taking the appointment of a consultant, accompanying him to the specialist, following the patient’s health, home visits, etc. During pre-independence and till about two decades ago, this routine service provider was called Family Doctor, who not only knew the patient but his entire family, even the healthier ones, knew the family’s health, financial status and even social history. He was not only a doctor but a friend, philosopher and guide. But the advances have gradually taken the toll on this relation. Now, this poor fellow has to cope up with 300 specialities. Let all these advances go at the speed of a Formula 1 Race, a General Practitioner still deals with 300 specialities. His knowledge goes on shrinking and now the time has come that he has become a referral ‘clerk’. He does not like to take risk. It has reduced the family doctor to ‘General Practitioner’ dealing with routine chorus and often labelled as unlikable word – referring practitioner. Specialist can be a Kupmanduk, but he cannot. He cannot specialise into upper half and lower half or right side or left side of the body. Recent government directive that every doctor must attend CME (Continuous Medical Education) programme to get 12 credit hours in a year to renew the practicing licence. Well! the idea is good, but the outcome is wanting.

At the end of 5 ½ years when he receives the degree, he realises that what he has learned is the hospital based medicine, which is of no use to him in general practice. He has seen the patients in the hospital that he is not going to treat, seen the gadgets which he is never going to operate and attended the operation which he is never going to perform. He has never seen patients with early symptoms, approach during home visits, tackling the emergency and psychology of patients. How will he get that? Experimenting on patients? No wonder, for all professionals, the word coined is ‘Practicing’.

Proliferation of medical speciality has spread its tentacles to the supporting industry viz, instruments, gadgets, medicines, etc. Supporting services like nursing, social workers, physiotherapy, etc. cannot lag behind. So? The specialisation has started in these services. Large metropolitan cities which cater not only to the city crowd but also from town and even from abroad has to keep pace with these advances. 75 bed hospital 60 years ago, has been reduced to small nursing home with basic facilities. I know that Rs. 100 crore was big budget for a ‘large’ hospital 50 years ago. Today, a multi-speciality big hospital would cost at least Rs. 1,000 crore. This is TODAY.

Today, any philanthropist desiring to do charitable service perhaps first thinks of starting a charitable clinic which would cater to patients at nominal charges, giving only 50 % of those charges to the attending consultants. Junior consultants also try their hand at such charitable institutions till they develop their own practice. Management of such clinics or hospitals exploit, dictate, bring undue pressure on the working of the doctors for their noble mission. Bigger the institution, greater is the exploitation of doctors and patients. Doctors are keen to mention on their business cards that they are ‘Honorary’ at such hospital with five star set-up and succumb to the dictats of the management. In such institutions,certain amount of revenue should be brought in the coffers. A blind eye is turned to the various complaints forwarded by fleeced patients. If a doctor cannot bring the desired amount in the kitty, overnight he is dismissed. There is no labour law applicable. There is no union. Higher the professional set up, lower is the chance of unity. If one is thrown out, another is already in the wings to replace him. It is the survival of the fittest.

I would like to give only one classic example – a well known heart surgeon openly tells the patients that he will charge a few lakh of rupees in cash over and above the charges fixed for the bypass surgery by the hospital. Either you get your heart repaired or go elsewhere. Hospital is well aware of this menace, but turns a blind eye and becomes deaf because he fills up their ‘Heart’. In fact, these hospitals do market survey to find out which doctors can fill their coffers. Today, specialists in large hospitals feel they do the work but hospitals are earning more out of his work. A doctor gets only 15 % of the total bill of the patients.

Amount invested in constructing and developing a hospital, purchasing new gadgets, discarding old ones due to advances need to be compensated by consultants of the institution (don’t ask how). Name of the philanthropist and the institution is perpetuated in golden letters in the history. Government audit on health care is patchy. Audit cannot afford to displease multi-millionaire philanthropist. They may need that hospital.

Specialists like to remain in the rat race. They go abroad to keep pace with advances but when they come back they have to convince the hos-pital management to implement what they have learned. A group of experts have to convince a group of businessmen. Only consideration for these businessmen for ‘importing’ advances is, it will it generate revenue; benefit to patients is irrelevant. Here the salesmanship and art of communication of the specialists will help to convince the management. One who sells becomes ‘Eminent’. One who cannot remains frustrated. For every specialist of a big hospital, there are at least ten who do not have the modern infrastructure. Year after year, this ratio is increasing.

Our Netas go abroad for surgery or call foreign experts. They go abroad for some undisclosed illness. Our Indian specialist experts then become stand by, onlooker, accompanying like luggage. They come back home, boast and cater to the common man. They write on their letter-heads jumble of alphabets indicating degrees and also do not forget to check proof which mentions honorary to the President, governor, Padma award, etc. Patients fall in trap of such cargo doctors. Some rich people go to such eminent doctors so they can boast in their high society group.

The road of frustration is unending. Milestones appear at regular intervals. Cutthroat competition and politics in hospitals make specialists regret taking up the medical profession. Well decorated consulting room, stationeries will attract five star patients and not knowledge and skill. He knows that money brings money. He knows that Reserve Bank’s coloured paper will bring status to him. Status brings more money. Those who left the glamour of big cities and left for smaller cities and towns not only prospered but also made a niche in the society and became known in the entire city.

Each specialist acquires knowledge and then tries to establish his sub-speciality. He will arrange lectures, seminars and conferences till he is recognised. From where is he going to get money? It is said that never consult a doctor when he is going abroad, buying a new car, renovating his clinic, purchasing flat or his progeny is getting married. He needs money and is searching for the source. We usually go by the services available in bigger cities but Government statistics are an eye opener. There is short fall of 76% doctors, 88% of specialists, 53 % of nurses and 80% of medical technicians on all India basis.

The menace of exploitation commences after one becomes a doctor. Capitation fees for admission to medical college, post graduate seat, hospital attachment runs into lakhs and at times exceeds a crore. A doctor is bound to recover this ‘ investment’ – sooner the better. Malpractice is a cheap word for recovering the investments – split practice, unnecessary investigations, prolonged hospitalisation, gifts from pharma companies, etc. One need not be brainy to search avenues of recovery. This investment was not there Yesterday. Examiners of medical examinations are bestowed with roll number of quite a few candidates of influential origin to show leniency and pass.

For an average doctor without ready ‘Gaddi’ life begins at 40 for a life span of 65 years. Yesterday, we had the option of selecting medicine, engineering and commerce. Today, generation is reluctant to take up medical profession. Many other professions are offering lucrative career and scope for creativity. Today’s generation does not wish to toil for half their life. They don’t crave for prefix ‘Dr.’ before their name. Non- medico girls do not prefer medico husbands. They want fixed hours of work for husband – evening free to spend time together with spouse, eat timely dinner, have family life with children, no night calls and boring doctors’ party. They don’t want a daily wage earner.

Choice of students will shift from medicine to other technical courses, MBA, computer engineering, jobs are available once they get the degree. Their earnings start during their young age. Medical profession is likely to become a hereditary profession. Paradoxically, India’s population is steadily increasing. Poverty and illnesses are also keeping pace with that. Geriatric population is rising as average life span has increased and so also has age related disorders. Stress has invaded all age groups. Need of doctors can never reduce. Every doctor will have a slice of the pie.

New large hospitals will be set up not by any philanthropists but by corporates. Money resources will be channelised into money spinning specialities like cardialogy, neurology, and orthopaedics which are capable of feeding pathology, radiology, anaesthesiology, hospital beds, and operation theatres. Other specialities are likely to get step motherly treatment. GRASP will be replaced. Button-hole surgery will replace exploratory surgery. Robotic surgery will partially replace human skill.

Consulting charges are steadily rising. At present juniors charge around Rs. 500 whereas seniors and super-specialists are satisfied with Rs. 1000 to Rs. 2500 in metropolitan cities like Mumbai.

Hospitalisation is expensive. Even Municipal Corporation and Government hospitals are beyond the means of people of lower income strata to whom these are supposed to be catering to. Angiography and then Angioplasty costs Rs. 47,000 over and above each stent costs Rs. 15,000. By-pass surgery costs Rs.1,05,000. No service is free. The future will become prohibitive even for middle class. Poor and middle class will be compelled to go to either substandard municipal or government hospitals. High cost of in-house medical services in hospitals will downgrade the preference of upper middle class in selection of hospital and type of room. Five star hospitals will be restricted to people from glamour world, corporate, netas or in dial emergency.

Cost of setting up a hospital will sky rocket. Medical insurance with maximum coverage will be a MUST for every individual. As such cashless hospitalisation is accepted by few hospitals. Experience is that insurance companies do not compensate even the legitimate treatment and hospital bill. Medico-legal cases of negligence of the doctors are on the rise in metropolitan cities. Doctors will not be considered as God.

There is silver lining for Chartered Accountants when medical specialities proliferate. Today with mountain of taxation and amendments coming before the budget, during the budget and any time between the budgets not only as per the need but also politically decided. Speciality has also creeped in CA’s profession. Income Tax, Wealth Tax, Sales Tax, VAT, Excise, Import duty, Export duty, Professional Tax, Service Tax, etc. With the volumes of laws and amendments, doctors are unable to keep track of all this. They turn their head towards CA who in tandem with doctors will take care of their financial health.

Medical profession is too personalised. Faith unlike love does not develop at first sight. Doctor is a daily wage earner. The day he does not work, his income is zero unlike a CA. CA’s staff continues to work on the assigned load. He continues to earn even in his absence and the daily wage earner doctors will continue to feed him. We prosper so you will also prosper.