Tuesday, April 11, 2017

The art of balancing

This article was first published in Indian Management, Vol. 56, Issue 1, January 2017, pp20-23; co-author: Kavil Ramachandran

Family businesses are akin to children for the members of the family. They see it grow and are usually very attached to it at an emotional level. While the family and the business are different systems, the former thrives on emotions while the latter on logic, yet the boundaries often get blurred with emotions creeping into business decisions and logic prevailing in relationships.

A family business leader, often the head of the family, wears three hats- that of a family member, a manager of the business and the owner of the business. To detach from the other two roles when taking decisions in one can be an onerous task. Succession is one such challenge where the different roles of the family business leader get interspersed and affect the decision making.

Succession is considered to be a process rather than a one off event. The selection of a successor, whether a family member or an outsider, depends on various factors, including the skills of the successor, family and inter-personal relationships, stage of growth of the organization and the current family business leaders’ readiness to step down.

The difficulties to choose the right successor depend on the following:
·         Possessiveness of the founder/owner and the belief of immortality: Just like letting go of grown up children is difficult, especially in the Indian context, so is letting go of the business. The incumbent’s inability to be detached yet involved, to accept that another person may be more suitable and relevant with changing times and to come to terms with the fact that no one is indispensable, often pushes the decision to find a successor under the carpet.
·         Individual values and stewardship: In a family business, values of the family set the tone for the goals of the firm. Similarly, the emotional link of the family members to the business assumes that the successor, if from the family, would act in the best interest of the business. The converse of this acts as an impediment to selecting a non-family successor.
·         Continuity of strategy and or organization culture: Continuity and long term view are the hallmark of family businesses, as is a unique organization culture. A family member as a successor can be groomed over the years to ensure continuity. When Russi M Lala, the biographer of JRD Tata, asked  him if he chose Ratan Tata as his successor because of his integrity, JRD replied, “Oh, no, you can't say that! It would imply that the other contenders did not have integrity. I think he will be more like me” (Source: http://www.tata.in/aboutus/articlesinside/H1mNrxBM8ug=/TLYVr3YPkMU=). On the other hand, the need of the hour might be a change in strategy and culture to keep up with the changing times.
·         Ability to have dispassion (detached passion): Cutting off the umbilical cord may be painful, but is a necessity. Letting go and allowing the successor to assert herself is important. A lengthy transition period, even ten years, may be helpful in easing the current business leader to slowly start taking a back seat and for the planned successor to get more and more involved in the day to day decision making. Dr. Anji Reddy, the founder of Dr. Reddy’s Laboratories had slowly moved into a research role since more than a decade, leaving the day to day management of the business to his son and his son-in-law, when he passed away in 2013. The transition was quite smooth due to the detached passion exhibited by Dr. Reddy (Source: An Unfinished Agenda: My Life in the Pharmaceuticals Industry, K Anji Reddy, Penguin Books Limited, 2015).
·         Resistance to change: When Manoharlal Agarwal, grandson of Haldiram Agarwal, the pioneer of the bhujia market, suggested changes in packaging, branding and expansion into the Capital of Delhi, he faced huge resistance from his father Moolchand Agarwal. Manoharlal, at every step, found ingenious ways to get around the resistance, which he anyways expected (Source: Description for Bhujia Barons: The Untold Story of How Haldiram Built a 5000 Crore Empire, Pavitra Kumar, Penguin/Portfolio, 2016). In a family business, due to the familial ties, decision making which may be good for the business sometimes gets difficult. The family business leader may not be ready to allow the next generation to come of age and may feel unwanted or irrelevant due to changes in the organization.

The above are just a few factors which may impact the choice of a successor. Succession planning has myriad complexities and hence Peter Davis commented that “Smooth Succession” is an oxymoron. He said, “Succession in a family business is probably the most complex management challenge anybody faces” (Source: http://gsappweb.rutgers.edu/cstudents/readings/Summer/Summer/Ballet_FamilySystems/handler_succession.pdf). However, some of the complexities can be untangled by systematically approaching the issue in a timely manner.

·         Clarity of successor’s role and capabilities: Setting the criteria for what are the skills, values, education and role of the successor is as important as finding the right candidate itself. This perhaps is the starting point and if this goes wrong, then the end result cannot be right. A lot of deliberations must be made by the family, along with the board, to come up with the list of criteria to find the best successor for the business.
·         Strong governance for both the family and the business and an independent board for the business: Long lasting multi-generational family businesses are known to practice good governance practices, both in the family, as well as the business. Some families have written constitutions that guide the selection of a successor, like in the Murugappa group, and some others have unwritten codes for succession planning. The board also plays an important role in mentoring and facilitating the transition of management and ownership.
·         Strong policies and processes: Adi Godrej, the Chairman of the Godrej group believes that “While family firms, both public and private, have innate strengths that give them an edge over their public counterparts, these strengths need to be meshed with unique systems to counter the effects of risks identified with family ownership, succession and the management of talent” (Source: http://www.business-standard.com/article/companies/make-virtues-of-family-business-everlasting-godrej-to-family-business-heads-115020700766_1.html) . As the business grows, putting in place the internal controls and professionalizing the firm puts the framework to attract external talent and also to lure the next generation family members to remain interested in the family business.
·         Leader quality beyond doubt: Integrity, skill, passion, values and decisiveness are some of the qualities to look for when choosing a successor. Alignment of the family values and goals with that or the goals of the business would be an important task for the successor. Therefore, the selection process must ensure that the successor can manage for the systems together.
·         Emotional support to exiting leader: It is important to maintain the support of the exiting leader by drawing upon their repository of immense experience and knowledge about the family and the business.


In summary, succession planning takes time and must be done in an orderly manner. The longer the leader stays on, the tougher it is! And more harmful it may be for the financial as well as the socio emotional wealth of the family firms.

Thursday, March 23, 2017

Tata Group versus Mistry

This article was first published in the Global Association for Risk Professionals on March 16, 2017; http://www.garp.org/#!/risk-intelligence/culture-governance/oversight/a1Z40000003PO1rEAG

A dispute with an ousted chairman becomes a very public case study in board governance.

On February 21, Natarajan Chandrasekaran assumed the role of chairman of Tata Sons, the holding company (promoter) for 29 companies listed on the Bombay Stock Exchange. From an initial personal capital of little over (U.S.) $300 in 1868 to an empire worth more than $125 billion today, the group accounts for 7.2% of the market capitalization of all companies listed on the Bombay exchange. It is the largest business house in India, making a mark in every major industry: steel, power, automobiles, aviation, information technology, telecommunications, financial services, consumer goods, education, health care.

In a period when lack of self-restraint, flashy lifestyles, and certain entrepreneurs’ projections of self over community have brought family-owned businesses under scrutiny for poor governance, Tata was long associated with ethics and quality. Its contributions to development of the communities where factories are located, the establishment of institutions of scientific research, education, and health care, are undeniable.

The stated mission of the Tata group is: “To improve the quality of life of the communities we serve globally, through long-term stakeholder value creation based on leadership with trust.”

Change at the Top
On October 24, 2016, in a move that surprised many, Cyrus Mistry, chairman of Tata Sons since 2012, was voted out by the board of directors and removed from his post. Mistry, whose family holds 18.4% of Tata Sons shares, had replaced Ratan N. Tata, who retired in 2012 after 21 years as chairman. A descendant of Tata group founder Jamsetji Tata and chairman emeritus of Tata Sons, Ratan came back after the removal of Mistry to serve as interim chairman to ensure stability and continuity until a new chairman was appointed.

Chandrasekaran was the CEO of Tata Consultancy Services, the largest company in the Tata stable by market capitalization, where he had spent his entire 31-year career. Recommended to be the next chairman by a selection committee, and unanimously endorsed by the board on January 12, Chandrasekaran became the first professional to take the top position at the 150-year-old parent.

The Mistry-Tata spat hurt the reputations of Tata group and Ratan Tata. There are many theories as to why it happened. One is a divergence between the group’s values and those of Mistry personally. His emphasis on profitability, hiving off or selling unprofitable businesses and reducing dividends to shareholders, is another.

Role of the Trusts
The Tata group has a complex ownership structure. Philanthropic trusts instituted and endowed by Tata family members hold 66% of Tata Sons shares. The articles of association give the trusts power to remove the chairman.

The trusts’ causes include education, health care, child nutrition, scientific research, art, culture, and rural life. The trusts’ source of income is the dividends paid by the Tata group companies to Tata Sons, which in turn pays out to the trusts. In other words, the trusts depend on the group companies to continue their charitable works. While Mistry was chairman, the dividends paid by various companies in the group were dwindling.

Values and Culture
Over its long history, the Tata group has in many instances shown that it values contributions to the society more than profits. R Gopalakrishnan, a former Tata Sons director, said in a 2013 interview: https://www.pagalguy.com/news/tatas-dont-produce-billionaires-much-of-our-profits-go-back-to-society-says-tata-sons-director-gopalakrishnan-16924355  “Yes, Tata cares about doing for society. About 2/3 of Tata’s profits go back in measures that help society. So if you notice, no Tata person can ever be a billionaire, we don't want to be one, we don't claim to be one. We don't want to be number two either. People look for deeper value than money and that is why they work for us, and our attrition rate is not bad.”

The way Mistry focused on profitability clashed with the traditional culture. Although Mistry claimed to align himself with “the values and ethics of Jamsetji Tata and the Tata Group,” the group has argued back that “Mistry and his family companies have not upheld the high standards and values set by Jamsetji Tata and his successors. Mr. Mistry has done precious little to build the goodwill of the Tata group, built through the hard work and dedication of its employees.” (Mistry retained his Irish citizenship and awarded contracts to his own family firm.)

Mistry contended that he inherited loss-making businesses from Ratan Tata, including the Rs 100,000 ($1,500) Nano car. A nod to the company’s social ethos, the Nano was a pet project of Ratan Tata, who wanted to give families dependent on two-wheel travel through rains and the hot sun the option of a cheap car.

According to Tata group, “Mr. Mistry has been a director of Tata Sons since 2006 and as such was fully involved in all the key decisions that the Tata group had taken over the years. It is unfortunate that it is only on his removal as chairman that he began making allegations and misrepresentations about business decisions he was party to for over a decade.”

Board Processes
Although the Tata Sons board of directors consists of eminent people whose actions in the interests of shareholders were never called into question, the dismissal of Mistry has become a bone of contention. Mistry called his removal “unique in corporate history,” coming with no advance notice – a matter taken up as an “any other item” on the board agenda.

On the other hand, Tata insiders have said that Mistry was given the opportunity to step down voluntarily.

The dispute has become a case study in corporate governance processes and discrepancies between form and substance. The Tata group may have not technically flouted any article of law, yet the entire affair does not “smell” right.

What can be said is that while Tata group companies individually are recognized for good governance and transparency, the organization at group level turns out to be quite opaque.

Wednesday, March 1, 2017

SMEs: Don’t push succession under the carpet

This article was first published in www.entrepreneur.com on February 27, 2017; Co-author: Kavil Ramachandran


Ninety percent of the businesses in India are family owned. About 30% of the family businesses listed on the Indian bourses got listed post liberalization in 1991. The first generation founder would still be actively involved in most of these companies considering the average age at which entrepreneurs start a firm to be 40 and the average retirement age for founder promoters to be 75.

Yet, most of them would now be ready to hang their boots and see the company passed on successfully to the next generation. In the pre-liberalization era, passing the baton to the next generation was mostly taken for granted and there was little resistance from the successor too as there were limited opportunities outside. The family business not only acted as an internal job market for the extended family but also kept many generations together.

However, succession is the most important challenge for small and medium sized enterprises (SMEs) today. Some of the larger businesses have explored various models like bringing in a non-family Chief Executive Officer, merger of the company with another company while retaining substantial stake in the merged business, etc. when they found that the successors were either not worthy of succeeding or did not share the same vision and temperament as the founders. Similar opportunities are available for the SMEs as well now a days to deal with the challenges of succession.

Some of the factors that influence the decision of the scions of business families to join or not to join the family business are:

Formal Education: With more and more people receiving formal education, those who may not be interested in the family business are deciding to move away from it and do something else in which they may have acquired a skill through education and training.

Emerging Opportunities: People get influenced by what others are doing and the opportunities available elsewhere, either within the country or outside. There is ample information available regarding the opportunities. The eco system and the environment have had an impact on the decisions of the individuals.

Access to capital: Development of the financial markets has enabled easier access to funds to people, enabling them to do different things. Also, in the cases where the business established by the first generation has done well, the gen-next is able to get seed capital from the family.

Changing mindsets of the families: With more exposure and liberalized mind sets, many of the families believe in giving the next generation the horizon of opportunities. If the decision is to not join the family business, that is acceptable. The families no longer want to burden the young minds with the thought that they have to succeed the family business. They want to give the next generation the free rope to pursue their own calling.

Dodla Sunil Reddy, promoter and Managing Director of Dodla Dairy Ltd, a medium sized company valued at around Rs 11 billion, says “if both my daughters do not want to join the family business, I would be fine with their decision and would even support them in their decision to do something of their own”.

With smaller family sizes and the next gen deciding to pursue their own calling, many of the smaller businesses do not have a successor in sight. In certain cases, even if the family is not supportive of the decision, the younger generation has snatched away the freedom to pursue their own dream. The family is usually upset, yet, if the youngsters are not allowed the freedom to take their own decisions and are forced to join the family business, it may ultimately result in doom for the business due to frustration and disinterest of the heir in running the business.

Therefore, it is important for the SMEs to explore alternative models that allow smaller businesses to list, get valued, get visibility and most importantly, ensure continuity of the business.

One such option is SME trading platform of the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE) launched in March 2012. The costs of listing are minimal and the cost of compliance is low compared to that of being listed on the main exchange. There are regulations in place to ensure liquidity in the SME market.

Listing would provide the smaller family businesses with equity financing to grow and innovate. They would get greater credibility and visibility that would help them on-board talent that can take the company to greater heights. The investors would also be able to identify and invest in emerging, high-growth companies and participate in the valuation of companies.

It provides the promoters with an opportunity to bring in professionally qualified people to run the business, yet, remain an owner. It is likely that by the business would ultimately grow into a medium and then a large enterprise, luring the future generations to be more actively involved in running the family business.

Similarly, IndiaBizforSale.com is a platform for SMEs where entrepreneurs can​ buy and sell businesses online. Apart from just buying and selling, the platform also enables Mergers and Acquisitions (M&A),​Joint Ventures, Equity stake sale (to raise funds), Partnership and Leasing. The founders Haripriya​ ​Bhagat and Bhavin Bhagat say that currently most of their clients belong in the range of Rs1crore – Rs25​ ​crores​as traditional investment bankers do not find this segment attractive enough.

These options are available for the smaller family businesses in the event of the next generation members not willing or able to join the family business. However, the best thing for the family businesses would be if the next gen members have the desire to change the family business with the changing times; take it to greater heights with the help of right lessons from the family and new age technology.


Most businesses recognize that succession is a challenge. But very few actually prepare for it. It is time that the first generation prioritizes it rather than pushing it under the carpet!

Friday, January 27, 2017

What Healthcare sector is expecting from Union Budget 2017

This article was first published in Business Today on January 25, 2017;
http://www.businesstoday.in/union-budget-2017-18/expectations/what-healthcare-sector-is-expecting-from-union-budget-2017/story/244957.html

It takes a healthy nation to build a wealthy nation. Focus on ease of doing business, creating jobs, building houses, putting more disposable income in the hands of people are all appreciated and needed. Yet, the importance of health cannot be undermined because all of the above will be meaningful only when the people who reap the benefits of such reforms are healthy enough to enjoy the benefits. Healthy citizens also improve the efficiency and effectiveness in the economy, thereby contributing much more to the nation.





India has one of the lowest health expenditure ratios in the world in terms of the government spending on health as a percent of GDP. This is lower than that of the low income countries as well. India is a lower middle income country as per the World Bank classification. Similarly, India also has one of the highest out-of-pocket health expenditure in the world, which is higher than the out-of-pocket health expenditure (as a % of total expenditure on health) of the lower income, lower-middle income, as well as the middle income countries (see Exhibit, Data Source: World Development Indicators).

The author asked a few renowned doctors in the city of Hyderabad, one of the major healthcare hubs of the country, regarding their expectation from the forthcoming union budget.

Budget Allocation
Dr. V.P. Jyotsna, Obstetrician, Expert in Gynecological Endoscopy and High Risk Pregnancy, the Birthplace, says that the first step should be to substantially increase the budget for healthcare. “In the last two budgets, while the absolute amounts have gone up, as a percentage of GDP, the expenditure has remained more or less stagnant”, she said.

Spending of the budget effectively
Dr Lavanya Kannaiyan, Consultant Paediatric Surgeon, Continental Hospital, says that even the budget that is allocated is poorly spent. “There are hospitals which build the infrastructure with the budget allocated to them but not enough thought goes into aspects like sanitation and staffing. While the number of beds increases, the care providers do not. The backbone of any health system is not the doctors but the nursing staff and technicians”.

Dr. Jyotsna suggested that all Community Health Centres (CHCs) in the country should be upgraded. She said that every small scale hospital, nursing home and clinic should have a basic level of facilities. “There are instances of a cesarean being undertaken without an Ambu bag and resuscitation kit for emergency. Accountability mechanism in the event of negligence or procedural lapses has to go up”.

Dr. Lavanya also points out that the number of government funded institutions has not kept pace with the rising population. “The backbone of our health infrastructure dates to the colonial period and the immediate post-independence period. There is only one government children's hospital per state while ideally there should be one or more per district”, she said.

Education
Dr Tarjani Vivek Dave, Consultant, Oculoplasty, Ocular Oncology, Orbit, Facial Aesthetics, L V Prasad Eye Institute adds that access to healthcare in India is severely limited by inadequate infrastructure. “Inadequacy is not only in terms of equipment but also manpower”, she said.

Dr. Jyotsna felt that the budget should focus on specific allocation for continuous updating of skills and knowledge not just for doctors but nurses and paramedical workers too. “We need more well trained nurses and paramedical staff. Improving medical education for all categories of medical staff will probably help the country a generation later, but it must be undertaken now!” Dr. Tarjani further emphasized the need for improvement in the quality of medical care that's provided. “Continuous medical education and certification of doctors is definitely the need of the hour”, she added.

Dr. Nitasha Bagga, Paediatrician and Neonatologist, Rainbow Children’s Hospitals said, “Medical teaching is the most important aspect to nurturing a good healthcare system. If the government is serious about improving healthcare in India, it must strengthen the government hospitals and the medical colleges, in terms of equipment, trained doctors and retaining trained doctors and staff”.

Dr. Jyotsna added that manpower was needed not just for providing healthcare services, but for analytics, administration and increasing the reach of services! Budget allocations should keep all these in mind. To attract good talent, the hospitals need to pay at par with the market rates.

Urban Rural Divide
Dr Lavanya said, “Most health professionals are in the urban centres. They shun rural areas because of the poor pay and hardships. Doctors must be incentivized to serve in remote areas. Government doctors’ pay has not increased proportionally compared to inflation”.

Dr. Jyotsna adds that by the time Doctors finish their post-graduation, they have a family. Accepting a rural posting, where access to good schools and basic facilities may not be available, is a difficult proposition. The only way out is for the rural areas to be well connected and sanitary conditions to improve. And maybe fixed period contract jobs where doctors have to show up actually and not just sign attendance once a week. That way doctors wouldn't mind a temporary stint for a few months in rotation.                       

In Australia and USA doctors posted in rural areas get paid a lot more than their urban colleagues. The Christian mission hospitals pay for the children's education at some of the best boarding schools.

Dr. Nitasha said that if government hospitals or health centers, especially in the rural areas, have ambulances with transport ventilators, it will be very useful for the rural population. The sick people can be taken to the nearest well equipped hospital with minimum casualty.

Dr. Saumya Dikshit, Radiologist, Tesla Diagnostics, said that awareness about healthcare is the key to improving healthcare in India, especially in rural and suburban areas.

Rising costs
Rising healthcare costs is a big challenge for the patients. Dr. Saumya said, “a significant cost is the cost of medical equipment and implants which ultimately get transferred to the patients. Most of the medical equipment and implants are manufactured abroad. There should be a huge incentive, either in terms of taxes, subsidies or grants to promote “Make in India” of medical devices”.

She adds that generic medicines are highly underrated at times and doctors sometime prescribe expensive imported medicines. Even though in the previous budget, it was announced that the government would open pharmacies to enable the public to access cheaper drugs, the effect has been negligible.

Even though the Indian pharma industry is a large player in the generics business, they still need to step up the value chain and endeavor to be a significant player in drugs discovery. The budget should encourage the pharma companies to increase their efforts towards research activities.

Dr. Nitasha points out that while there are many state and centre sponsored health insurance schemes, there are still many poor people who are either not covered or are not aware of the schemes. As a result, they are devoid of the treatment. Each and every Indian should have an equal right to be treated irrespective of their social and economic standing. Till the gap between the private and government sector remains as wide as it is now, in terms of quality of treatment, health cannot be universal. A universal health cover must be worked out by the government sooner rather than later!

Concluding remarks
All the five doctors that the author spoke to also concluded that in the end every penny that goes into laying roads, highways, sanitation, clean drinking water and food subsidies, contribute to improving healthcare in some way or the other.


Sufficient allocation of funds and its effective utilization; impetus to education and ‘effective’ training; investments in quality assurance; building infrastructure; containing rising costs and bridging the urban rural divide should be foundations on which Mr. Jaitley should base the health budget for a healthy India!

Tuesday, January 24, 2017

Income tax returns- From fiction to fact


“Income tax returns are the most imaginative fiction being written today.”–Herman Wouk, a Pulitzer Prize winning American author, who is more than 100 years old now!

We know that this quotation is quite apt for India. Prime Minister Narendra Modi said in his address to the nation on December 31st 2016 that only about 24 lakh people declare income more than Rs10 lakhs in India. “Can we digest this? Look at the big bungalows and big cars around you. If we look at any big city, it would have lakhs of people with annual income of more than 10 lakh”, he said.

He was of course right in expressing his anger towards people who either don’t declare any taxable income or under declare taxable income, with the aim to evade tax. All the honest tax paying citizens of the country feel the same anger.

In the recent weeks, there have been a lot of indications from ‘sources in the know of things’ that there may be some incentive for more people to pay taxes. These could be in the form of lower tax rates, broadened tax slabs, bringing in standard deduction and increased exemption limits. As per many media reports that quote ‘officials involved in the budget making process’, the focus would be on widening the tax net.

Direct taxes are the sole jurisdiction of the Central government. Yet, no government has taken any radical steps to simplify the income tax act or to crack down on non-compliance in a major way. In the 1970’s the income tax rates in India were draconian with the highest tax slab resulting in more than 90% effective tax rate. In the decades of 1980s and 1990s the direct taxes started to get rationalized. In the FY 1997-98, the highest tax slab was brought down to 30%. Direct Tax to GDP Ratio was 3.25% in Financial Year (FY) 2000-01. It improved to 5.55% in FY 2014-15. Was it due to the ‘Laffer curve’ effect?

‘Laffer curve’ theorizes that at 0% tax rate, there will be no tax collection and at 100% tax rate, nobody will pay tax; meaning no tax collection. The theory implies that there is an optimal tax rate at which the tax revenue will be maximized. There is an arithmetic effect of a change in tax rate and a counter economic effect. For example, if the tax rate is decreased, the arithmetic would imply that the tax revenues will decrease. But the economics will imply that more people will pay taxes at lower rates and hence the revenue may be higher. Similarly, if the tax rate is increased, the tax revenue will increase based on simple arithmetic, but the economics would imply that more people may look for ways to evade and avoid tax thereby reducing the revenue. There is an equilibrium rate at which the tax collections get maximized.

So did the lowering of tax rate in late 1990s result in higher tax collection over the years (these things generally take a long time; 5-10 years or more to show results)? Or did the Direct Tax to GDP Ratio improve due to high economic growth during the last decade?  If we see this in the perspective of India’s GDP per capita, we find that while Direct Tax to GDP Ratio became 1.7 times from FY2001 to FY2015, the GDP per capita increased 5 times during the same period. It may be reasonable to conclude that the increase in direct tax collection was due to improving economy, albeit at a much slower pace than the economy!

So would a reduction in tax rates, as is widely expected from the forthcoming budget, result in widening the tax net and increase in tax revenues? If there is scope for people to escape the scrutiny of the tax men by either bribing them or by remaining below their radar, the answer would be No! Both may happen in India as corruption is rampant and the scrutiny is limited! The tax administration or the tax men are simply not geared up to take up the task of scrutinizing people at a mammoth scale that is warranted in the case of India where only about 4% of the population file tax returns.

So how will lowering the tax rates help the government? Well, it will be a goodwill gesture with a prayer in their heart that the lower tax rates result in inducing more people to start filing tax returns. The inconveniences suffered by the public through the process of demonetization might appear to be worthwhile (especially for those who pay taxes honestly) if they see some savings in terms of taxes. It will appease the honest taxpayers to some extent.

This move will work in improving the fiscal situation of the government if effective use of technology is made to crack down on people who have been totally outside the tax net so far, as also those who have been under-declaring income. A lot of this data will now be available with the Income Tax department thanks to ‘demonetization’ and reporting of deposits by banks to the tax authorities. The momentum should not be lost and without harassing the citizens, explanations must be sought regarding sources of income and mismatch of declared income versus deposits in banks. For most ordinary citizens, a query from the income tax department would be enough to put their house in order.

This is an opportunity for the government to de-fictionalize the income tax returns of people and get them to face reality! 

Demonetization: The Longer Term

This article was first published in the Global Association for Risk Professionals on January 19, 2017

Beyond India’s near-term dislocations are possibilities for a wider and fairer tax net, financial inclusion and economic growth.

Little else has been on the minds of Indians since Prime Minister Narendra Modi announced the demonetization policy on November 8, 2016. It was undertaken primarily to curb black money and corruption in the Indian economy, a sweeping move with numerous intended and unintended impacts. A few positives are growth in cashless transactions, curtailment of counterfeit notes and terrorism financing, and creating a blip in the minds of tax avoiders. The negatives include the inconvenience to the public and short-term slowdown in many sectors, especially those that are heavily dependent on cash, a large portion of which are believed to be black money, like real estate and jewelry, loss of jobs, etc.

The prime minister asked the population to bear with the inconveniences for 50 days – but when that time passed, no magic wand was waved. What is clear is that the government pulled off an unprecedented gargantuan project and is in no mood to relent to the opposition. “We cannot allow this fight against black money and corruption to stop or slow down,” Modi said in a December 31 address to the nation.

In an earlier speech, the prime minister had said, “Demonetization is not the end, but beginning of a long, deep and constant battle against black money and corruption. It will benefit the poor and the common man. The poor and the lower and middle classes have suffered the most due to black money, counterfeit currency and corruption.”

The battle against black money is expected to be extended beyond cash, to properties, jewelry and gold, and foreign currency, in due course. A sizable parallel economy accentuates income inequality and is a deterrent for honest taxpayers. Hence there can be no question about the intent to curb it.

Success or Failure?
The Rs500 and Rs1,000 notes that were demonetized constituted about 86% of all currency in circulation. As per State Bank of India estimates, on November 9, the total value amounted to Rs 15,440 billion. It is further estimated that more than 90% of the demonetized currency has found its way back to the banks. (Please note that these are the estimates at the time of writing and may not be the final numbers. The government has raised concerns that there may have been double counting of the currency deposited in the banks and has asked the central bank, the Reserve Bank of India [RBI], to check the data again.)

Figure 1
Source: Hermes Investment Management, World Economic Forum

Further, many economists and politicians have argued that cash accounted for a very small percent of the overall black economy in India – 12% according to India Ratings and Research, a credit rating agency. The other 88% is in the form of real estate, jewelry, foreign currency, etc. In effect, only a small percent of the black money has been eradicated.

So was the entire exercise justified? Should the government have taken such a step for just about Rs1,000 billion, or even less?

That cannot be answered now. A couple of years from now, we may be in a better position to make more informed pronouncements rather than conjectures, with the benefit of data and hindsight. There are many far-reaching implications whose impact on the economy and lives of the people is thus far difficult to ascertain.

Hermes Investment Management’s emerging markets team, headed by Gary Greenberg, in a first-quarter Gemologist newsletter, looked beyond the immediate shocks in assessing a range of “Modinisation” reforms including demonetization: “Modi’s moves are excellent from a long-term perspective but the evidence suggests that some of the reforms will continue to have an adverse impact on earnings in the near term. Nevertheless, they create solid foundations for long-term sustainable growth driven by higher productivity – and this is what really matters, in economies everywhere.”

Long-Term Implications
Cashless economy: This will not happen overnight. India will not become a cashless society. However, a less-cash society is a possibility, and never before has India or any other country seen the kind of thrust towards digital payments that has resulted – a huge spurt in plastic card, online banking and e-wallet transactions since the ban was announced. There are infrastructural and cultural issues that must be overcome. Yet, with 65% of the population below the age of 35, change is possible.

Taxation: The prime minister mentioned in his December 31 speech that only 2.4 million people declare income of over Rs 1 million. This cannot be realistic. The number of luxury cars sold in India, the number of premium apartments sold each year, and the number of people going on foreign holidays all point towards the fact that many of those who earn more than Rs 1 million either don’t file tax returns or declare lesser income to avoid tax.

The government has said that about Rs 7,000 billion was deposited in 6 million accounts, and these will be scrutinized by the income tax department to find out if the deposits matched with the tax returns filed by these account holders. This action will definitely result in bringing more people into the tax net in the future.

Cash-less transactions have the added benefit of leaving audit trail that tax authorities can track. A broadened tax net would hopefully result in lower tax rates over time. Many smaller businesses that do not want to be a part of the formal economy due to high tax rates may then voluntarily consider being a part of it.

Economy and Banking
GDP: The parallel economy results in underestimation of gross domestic product. Former Prime Minister Manmohan Singh, a prominent economist himself, criticized demonetization and said that the GDP may decline by as much as 2%.

While this might be true in the near term, research has shown that corruption and black money have a negative impact on GDP and its growth rate. In the long run, reduction in corruption and black money should result in an increase in GDP, everything else being equal. Also, more cashless transactions will bring more small and medium-size enterprises into the formal economy.

Cost of capital: The banks are flooded with cash deposits and as a result have begun to lower interest rates. State Bank of India, the largest in the country, cut its lending rates by 90 basis points on January 1, and many other banks followed suit. While the RBI did not change the repo rate in its December policy review, the banks have still chosen to lower the rates. This indicates that the banks have decided to cut their margins and hope for volumes. The deposits will also have a multiplier effect in terms of stimulating investment.

Financial inclusion: The government used the opportunity to push financial inclusion by asking employers to open bank accounts for all their employees, including contract workers. Prasanna Tantri of the Indian School of Business, based on research published in top economic and finance journals, writes in Live Mint that moving money from home to the bank can have “enormous first-order benefits for the poor: The benefits would include increase in income, business investment and health spending, among other things.”

Prime Minister Modi stressed in his speech that re-monetization and bringing the banks to normalcy is the priority now. He also reiterated that demonetization was just the beginning of the battle to purify the nation of corruption and black money.

The story is still unfolding, so let’s not write off demonetization as a failed exercise quite yet. With appropriate use of technology and continued political will, it might just be what was needed.

Friday, January 13, 2017

Buying a Used Vehicle? Check your gaadi first!

Co-author- Saumya Rastogi

The used vehicle market in India is growing leaps and bounds – For cars alone the overall market size is close to $15 Billion and is expected to touch $45 Billion in next 4 years. While the growth projections are certainly encouraging, most of this market is still dominated by unorganized players. Consider this – Out of approximately 15000 used-car dealers in India only about 1000 are organized. A whopping 84% of the car transactions happen either between two unknown people (C2C) or through unorganized car dealers. In such a scenario, how does one ensure the quality of the vehicle?

The seller knows everything about the vehicle whereas a buyer has no clue! Information asymmetry between the buyer and seller has been the biggest drawback of used car market or popularly termed as “market for lemons”. With the growing consumer interest in second hand vehicles, players are entering this space to bridge this information gap. CheckGaadi.com is one such startup that aims to reduce asymmetric information between buyers and sellers in the used vehicle transactions with the use of technology. CheckGaadi.com is positioned as a truly independent vehicle inspection startup that avoids any conflict of interest by not getting involved in the buying or selling process.

Founded by Amit Nigam, CheckGaadi.com is an early entrant in this untapped domain. Amit holds MBA from IIM Calcutta prior to which he studied B. Tech at NITK Surathkal. He has an experience of 15 years in software products development. Like many other customers, Amit also suffered from the problem of incomplete information in buying a car for himself and it was then that he felt the need for a solution to this problem. Amit’s experience at Bosch (largest supplier of automotive components) served as a base to equip him with domain expertise for this industry.

Here is the story of CheckGaadi.com from its founder Amit Nigam.

CheckGaadi.com is a very different kind of startup. Would you like to tell us about it? What are the services offered?
CheckGaadi.com is a year-old startup committed to bringing transparency in the purchase/sale of used vehicles. It works as an e-commerce platform; providing on-demand services to customers from the convenience of their homes or offices.  You can call it an online marketplace which provides prospective buyers with expert technical opinion about vehicle quality and advice when purchasing vehicles, thus helping them in making informed decisions at fair prices. The inspection is provided at a nominal fee of Rs 999/- for cars and Rs. 649/- for bikes.

Do you only offer inspection service or you also have collaboration with Repair & Servicing Centers? If not, are there any plans for expanding your network with Service Centers?
We operate via co-branded B2B partnerships as well as direct B2C channels.
We also have quite ambitious plans to serve the customers at every step of vehicle ownership value chain. At present we are conducting a number of pilots and working towards establishing a repeatable model.

How do you incorporate technology in your business?
This space is largely unorganized and has been traditionally served by local garage mechanics. We are trying to bring transparency in multiple dimensions – service quality, pricing, customer interactions, process standardization, predictable output formats etc. Technology takes the center stage in delivering all these promises; everything that can be automated is automated at CheckGaadi.com.

We have developed a proprietary technology called “mini-ERP” which helps us achieve the best in class efficiencies at scale, while making the complete process transparent to all stakeholders. Vehicle inspections are core to our business and we have demonstrated it by investing in this technology. While almost everyone in this business uses “pencil above the ear” approach to vehicle inspections, we have led from the front to deliver the quality and transparency that the customers deserve.

Your website shows Bike Inspection “51 Point Check” and “106 Point Check” for Car Inspection. Can you explain this?
We offer “51 Point Check” for Bikes, that is, 51 point check across all critical areas of 2-wheeler like Engine, Exhaust, Brakes, Suspension, Sprocket, Tires, Bearings, Electricals and all other subsystems. Similarly, for cars we offer 106 point check across all critical areas of a 4-wheeler like Engine, Brakes, Transmission, Suspension, Tires, HVAC, Electricals and all other subsystems.

In which city do you currently offer service? Are there any plans for expansion?
We currently service 6 cities (+5 in NCR) – Bengaluru, Delhi & NCR, Mumbai, Chennai, Pune and Hyderabad. We are looking to add 4 more cities in our list in the short term.

How is CheckGaadi.com different from its competitors? We believe the market is not too penetrated in this area. What is your view on the same?
We are India’s first fully independent vehicle inspection services provider serving both 2-wheelers and 4-wheelers of all brands under a single umbrella. Our “independence” puts us in the position of strength – we don’t get involved in the vehicle buying or selling process and hence can focus on our core offering, i.e., vehicle inspections. Independence and our first-in-class technology led approach is the USP of CheckGaadi.com.

In your business, customers need trust on your inspection service, as their future decision is solely based on your judgment. How do you built that trust and confidence in the customer?
There are enough checks and balances right from the time we recruit the technicians, train them on the do’s and don’ts, continuously taking customer feedback on them and most importantly, incorporating severe disincentives for any deviation from the process.

What are the kinds of employee roles available at CheckGaadi.com?  What is the background preferred for those roles?
We mainly hire for operational roles such as Operations Managers, Operations Executives of varied experiences, BPO executives, automotive domain experts etc. In order to ensure candidates of proven credentials we prefer to hire via referrals; either the candidates should have demonstrable on-the-job experience or should possess relevant technical background (ITI, Diploma, etc.).

How is CheckGaadi.com funded? Are you looking at raising funds in the future?
We are boot-strapped as of now but in advanced stages of closing our first round of funding.

What according to you has been the Eureka! Moment in your journey so far?

We were recently chosen in top 1% of the startups across India amongst those who participated in LetsIgnite – India’s largest Angel conference.