How does the depreciating rupee affect one’s personal savings and finances? A new book explains it

This article was first published in the Scroll. 

https://scroll.in/article/1093589/how-does-the-depreciating-rupee-affect-ones-personal-savings-and-finances-a-new-book-explains-it

An excerpt from ‘The Economy Is Personal: How Big Economic Forces Shape Your Money – And What You Can Do About It’

Have you ever heard someone say, “The rupee is falling against the dollar”? It might sound like financial jargon, but it actually has a very real impact on your day-to-day expenses – even if you’re not travelling abroad. Let’s break it down.

Every country has its own currency. When countries trade with each other, they need to convert their currency into the other’s. So, for example, if India wants to buy something from the US – like crude oil, electronics or machinery – it has to pay in US dollars, not rupees.

Today, 1 US dollar = Rs 75. But next month, 1 US dollar = Rs 80.

This means the rupee has weakened, depreciated or lost value compared to the dollar. Earlier, India needed Rs 75 to buy something worth $1. Now, it needs more rupees, that is, Rs 80, to buy the same thing. That extra Rs 5 has to come from somewhere – and that “somewhere” is your wallet.

So, when the rupee weakens, imports become more expensive, because we need more rupees to buy the same goods from abroad. And since India imports many essential items, like fuel, cooking oil, smartphones, and electronics, those prices go up for everyone. This increase in prices contributes to overall inflation.

Think of it like shopping at a store where the price tag is in dollars. If your rupees are worth less each week, you’ll have to spend more to buy the same things.

That’s why economists and policymakers closely watch the exchange rate. A weak rupee can make imported goods expensive, and that, in turn, can raise prices across the economy – even for things made in India, because transport and input costs can go up.

Why does a falling rupee make your grocery bill heavier?

Because when imported goods and transport get pricier, those costs ripple through the entire supply chain. When the rupee drops, even your shampoo bottle, bus ticket or smartphone can feel the pinch.

So … What does the exchange rate have to do with the price of milk? If fuel prices rise due to a weaker rupee, transport costs go up and, suddenly, your morning milk costs Rs 2 more.

Inflation refers to the rate at which the prices of goods and services rise over time. In India, this is most commonly measured using the consumer price index (CPI). It is a statistical measure that captures the average change in prices of a fixed basket of items, such as food, fuel, clothing, housing and healthcare, that households typically consume. The base year, currently 2012, is assigned a CPI value of 100. All subsequent values show how much prices have risen since that year.

CPI in 2024: 190. CPI in 2025: 194

This means that prices in 2025 were 94% higher than in 2012. But to find inflation for one year, we look at the rate of change between the two years.

So, inflation is 2.11%, even though the CPI level is 194. The CPI tells us prices are almost double what they were in 2012, but the year-on-year increase is what we refer to when we say that inflation is 2.11%.

The Ministry of Statistics and Programme Implementation (MoSPI) publishes CPI data every month. The RBI monitors it closely to make interest rate decisions. If CPI rises sharply, even due to something like a tomato price spike, it can prompt the RBI to raise interest rates, which affects loans, EMIs, savings returns and overall economic activity.

Can everyday consumers affect global inflation?

Absolutely. When millions of people suddenly start spending more (like after the Covid-19 lockdowns), businesses struggle to keep up with demand. As we saw earlier, this pushes prices higher and is known as ‘demand-pull inflation’. For example, when Americans began “revenge spending” in 2021, global supply chains couldn’t catch up, which drove up the prices of electronics, furniture, fuel and even shipping containers. What you buy, how much and when – these choices affect the entire economy.

Now let’s bring this back to your wallet. Where does Rs 10,000 go in five years?

Similarly, suppose you save Rs 5,000 every month for ten years in a savings account that earns 3% interest. By the end of ten years, you’ll have saved about Rs 7 lakhs. Sounds like a decent amount, right?

But now imagine inflation has averaged 6% during that time. To buy the same things you could have bought with Rs 7 lakhs ten years ago, you would now need over ₹9 lakhs.

So even though your savings have grown in number, their real value has shrunk. That’s the silent, invisible power of inflation – it eats into your future, rupee by rupee.

And this affects your dreams:

The house you planned to buy: Now out of reach.

The college education you thought you’d covered: Now costs double.

The retirement you hoped would be peaceful: Suddenly feels uncertain.

This is why just saving isn’t enough. You need to make your money grow faster than inflation, and that means you’ll need to invest. But every investment carries uncertainty. Risk isn’t something to fear; it’s something to understand.

Credit card is not for impromptu Bali trips. Use it to invest in yourself

This article was first published in the Print, June 16, 2026; https://theprint.in/pageturner/credit-card-bali-trips-invest/2961457/

Credit can be a powerful bridge between today’s desires and tomorrow’s means, but it must be used with care. At its core, credit means borrowing now and agreeing to repay later, with an additional cost known as interest. Lenders—banks or fintech platforms—charge an annual percentage rate (APR) to compensate for the risk of non-repayment and forgo the opportunity to deploy those funds elsewhere.

In a healthy economy, credit fuels growth. Students use education loans to gain skills, businesses tap working-capital lines to bridge seasonal cash-flow gaps, families stretch EMIs over decades to buy homes. However, when credit is misused, debt piled on high-interest credit cards or personal loans, the same tool that creates opportunities can turn into a persistent burden.

Credit-card APRs often exceed 25–30% annually, turning unpaid balances into a mounting liability. Suppose you have a ₹2,00,000 credit card balance at 30% APR. Let’s see what happens if you are not able to pay the full amount on the due date. Let’s assume the minimum payment is 2% of the opening balance. Therefore, you pay ₹4,000.

After paying the minimum, the remaining amount accrues monthly interest. The remaining amount, or the new principal will be: ₹2,00,000 – ₹4,000 = ₹1,96,000 Now let’s add one month’s interest: ₹196,000 × (1+0.025) = ₹200,900. So, after one month, despite paying ₹4,000, you still owe ₹200,900, an increase of ₹900 due to interest. If you again pay only the 2% minimum on the new balance, the process repeats. Thus, it barely reduces the principal and can let your balance and total interest rise over time.

Pro Tip: Before you swipe your card, remember: if you can’t pay your balance in full each month, high‐APR debt can quietly grow even while you’re making payments. Always run these numbers first. You’ll often find it makes more sense to borrow less or choose a lower‐cost alternative. Responsible credit use hinges on three pillars: understanding costs, maintaining discipline and aligning borrowing with your long-term goals.

First, know your APR and repayment terms. A loan or card that seems attractive on an ad may carry hidden fees such as late-payment penalties, annual charges or high default rates, that transform convenience into a trap. Second, treat credit like a knife: indispensable in skilled hands, dangerous when misused. Always ask, ‘Can I repay this in full by the due date?’ If not, reconsider the purchase or seek a lower-cost alternative. Third, use credit to invest in yourself or essential assets—a degree, a home or a temporary shortfall—rather than funding fleeting indulgences, like an impromptu trip to Bali.

Credit scores, summaries of your repayment history and utilisation of credit, determine not only your access to credit but also the rates you pay. Consistently paying on time and keeping utilisation low builds a strong score, unlocking cheaper loans and premium card benefits in the future. Macroeconomic forces shape credit availability and cost.

When central banks lower policy rates to spur growth, borrowing costs fall, making mortgages, car loans and even credit card interest more affordable. Conversely, in times of rising inflation, central banks may hike rates, EMIs on floating-rate loans climb and credit card charges mirror the market tightening.

Economic downturns can trigger stricter lending criteria, as banks guard against rising defaults. Across the globe, credit cultures differ. In the US, credit card penetration is high, and APRs can soar above 20%, yet rewards programmes entice responsible users. In Germany, consumers favour debit and cash, shunning high-interest cards.

In India, soaring education and housing costs have fuelled rapid growth in personal and home loans, even as credit card adoption remains nascent. Understanding your country’s credit norms helps you benchmark your own borrowing habits.

War Chests and Emergency Funds: Why Households Must Think Like Institutions

This article was first published in the Economic Times, April 30, 2026

Periods of geopolitical tension have a way of reminding us how little control we really have. The ongoing conflict in the Middle East, involving Iran, the United States and Israel, is not just a distant headline. It has implications for oil prices, inflation, interest rates and financial markets across the world. For households, these shifts translate into something far more immediate: uncertainty in income, expenses and financial security.

In such moments, one principle becomes particularly relevant. Just as nations and institutions prepare for shocks, households must do the same.

Think Like Institutions: Build a War Chest- In my work with family offices, one idea I emphasise consistently is the importance of maintaining a “war chest”, a portion of wealth set aside in safe and liquid assets. This is not capital meant for growth or return optimisation. It is capital meant for survival, stability and optionality. It ensures that when disruption hits, decisions are not driven by panic.

The same logic applies, perhaps even more urgently, at the level of individual households. Financial resilience is not built in the middle of a crisis. It is built before one.

Your Emergency Fund Is Your First Line of Defence- At the level of the household, the equivalent of a war chest is an emergency fund. Its role is simple but critical. It protects your life when your income cannot.

It absorbs the shock, allows you to maintain continuity, meet obligations, and most importantly, think clearly about your next steps. The triggers may vary, a macroeconomic slowdown, job loss, health emergency, or a broader systemic event such as a pandemic or financial crisis. What unites these is their unpredictability and their ability to disrupt cash flows.

How Much Is Enough Depends on Your Reality- There is no single number that works for everyone, but there is a guiding principle. At a minimum, three to six months of essential expenses such as rent, food, utilities, healthcare and loan repayments should be non-negotiable. For those in volatile industries, with variable income streams, or with significant dependents, a longer buffer of twelve to twenty-four months is prudent.

This is where risk is often underestimated. Income is treated as stable until it is not. Entire sectors can slow down simultaneously. Hiring freezes, delayed payments and business contractions tend to cluster in times of stress.

The real question is simple: how long can you sustain yourself if your income stops tomorrow?

Safety and Liquidity Matter More Than Returns- Equally important is where this fund is held. An emergency fund is not an investment strategy. It is a protection strategy. The purpose of this capital is not to grow, but to be available when needed, without loss of value. In periods of stress, liquidity becomes more valuable than return.

Funds locked in real estate, equities, or long-term instruments defeat this purpose. Instead, this reserve should be held in low-risk, highly liquid options such as savings accounts, liquid mutual funds, or short-duration deposits.

There is also a behavioural dimension. Without a buffer, households are forced into unfavourable choices, selling long-term investments at the wrong time, taking on expensive debt, or cutting back on essential spending. With a buffer, decisions become measured rather than reactive. Time, in a crisis, is an asset. Liquidity buys that time.

Conclusion

The current global environment is a reminder that volatility is not an exception. It is a recurring feature of economic life. While we cannot control geopolitical events or macroeconomic cycles, we can control how prepared we are for them.

A war chest does not eliminate uncertainty. But it ensures that uncertainty does not dictate your choices. Because when disruption arrives, as it inevitably will, the difference is not in the event itself. It is in how prepared you are to face it.

NPAs are everybody's problem

This book review was first published in Business Standard on July 10, 2020; https://www.business-standard.com/article/beyond-business/npas-are-everybody-s-problem-120071000014_1.html

Vivek Kaul's Bad Money: Inside the NPA Mess and How it Threatens the Indian Banking System provides the answer and I am wiser years after having taken the loan

Book: Bad Money: Inside the NPA Mess and How it Threatens the Indian Banking System

Author: Vivek Kaul

Price: Rs599/-

Pages: 339

Publisher: Harper Business, an imprint of HarperCollins Publishers

When I was a fearless in twenties something, sometimes broke, research scholar, I went ahead and bought an under construction flat. I took on a home loan that covered 85% of the cost of the flat and a personal loan that covered the remaining 15% that was used for the down payment. After paying the EMIs, I would have barely enough to pay my share of the rent of a 500sft apartment shared by 3 or sometimes 4 friends and eat three square meals a day. I had started walking longer distances instead of taking autos, I stopped going to the Café Coffee Day and for shopping, unless for essentials. I sold the apartment soon enough at double the price.

In the recent years, whenever I have taken a loan, bogged down by the paper work, my thoughts always go back to those days and I always wonder how did someone like me, with no guarantors, on a stipend (not even a salary) and no credit history ended up getting the loans back then?

Vivek Kaul’s “Bad Money: Inside the NPA Mess and How it Threatens the Indian Banking System” provides the answer and I am wiser years after having taken the loans. Those were the years, 2005-06, when the bad loans rate was below 5 percent and hence the banks had “decided to go easy on their lending” and the growth rate of lending was highest around this time.

Last year, a friend lost her job and defaulted on the EMIs of her car loan and after the fifth month of default, two employees of the bank came and took her car away. She asked me, “How is it that Vijay Mallya and Nirav Modi get away but people like us can’t?” I had jokingly replied, “well you could get away too if you absconded to another country with the car.” Last week, I asked her to read Kaul’s book in which he lucidly explains why ‘If you owe your bank a hundred pounds, you have a problem. But if you owe your bank a million pounds, it has,’ as John Maynard Keynes had remarked and modified by the Economist [magazine] as “If you owe your bank a billion pounds everybody has a problem.” She read the book and called to thank me for suggesting it.

As evident from the above examples, Kaul’s book, if read with the attention it deserves, helps everyone, not just the economics and finance students and practitioners, to understand how developments in the banking sector and the various cycles of lending, NPAs and regulations have implications for everyone. The decisions taken over time slowly and steadily weave an invisible mesh of mess that gets noticed only when someone like a Mallya or a (Nirav) Modi gets trapped in that web and catches the imagination of the nation. How does this mesh get woven? That is what Kaul traces and explains in his book.

“Bad Money” is a focused saga of the banking system in India that includes the creation and evolution of the public sector banks, nationalization and privatization, regulations by the Reserve Bank of India such as the Insolvency and Bankruptcy Code, 2016 and how the politics too played out along the way. It goes back and forth like a “Tarantino movie”, as Kaul puts it, goes into the back stories, the sub-plots and the numbers that substantiate the stories.

The problem with the book lies in its strengths. The book is focused and hence it may not seem appealing to readers who look for more broad-based books on the economy and the financial system. However, once they pick up the book, they will find that it does take an overall view of the financial system while keeping the banking system at the centre. The book also throws a lot of numbers and graphs at the readers that may act as speed breakers, in an otherwise fast paced book, while reading though they make the book more authentic in its analysis.

The book is a one stop shop for anyone looking for references on the Indian banking system. One can only marvel at the number of books, monographs, articles, and documents from various websites that have been referred to. Anyone researching related topics need not look elsewhere and may be able to add only a “delta approaching zero” to what Kaul has written. This book organises the messy material and presents the “long and short” of it in a readable, understandable and relatable manner.

The Impact of the Coronavirus on Investment Decisions

This article was first published by the Global Association of Risk Professionals, Risk Intelligence, on June 19, 2020; Co-author: Anisha Sircar; https://www.garp.org/#!/risk-intelligence/market/investment-management/a1Z1W000005VYeIUAW

As the world heads toward a global recession, with plunging equity markets and countries facing severe economic downturns, there are uncertainties and strong beliefs that have practically divided the world into the optimists and the pessimists. There are those, for example, who make rash, seemingly opportunistic investment decisions, and those who are more measured in their financial approach. Those who unwittingly indulge in herd behavior, and those who are less prone to such external influences.

What's more, there are those who are extremely cautious, favoring extended lockdowns and total isolation, versus those who have a more “que sera, sera” approach to COVID-19, supporting getting back to normal as early as possible.

It's easy for one group to feel that the other group is being unreasonable. The pandemic's unprecedented impact on our lives, both in the short and the long run, makes people highly susceptible to making decisions they would have otherwise avoided.

In this article, we reflect upon the financial and investment decisions being made by people in the backdrop of the pandemic, and the dichotomy facing risk managers and investors. What are the obstacles standing in the way of investors making rational decisions and avoiding unnecessary risks in a time of crisis?

Bias

When analysts, policymakers, “experts,” and/or news reports offer statements and opinions, it's sometimes assumed that they know what they are talking about. However, people find opinions credible as long as it confirms their own thoughts or anxieties, or as long as they seem like “educated” or even consensus-based guesses. This can involve a range of biases, from herding behavior, to action biases, to confirmation biases.

When COVID-19 hit markets, it resulted in phenomena such as dwindling risk appetite and investor interest and declines in the perceived values of stocks. That led to dramatic drops in stock prices, wiping out any potential investor gains.

Herding behavior is tricky with respect to risk appetite and investing. It drives markets toward excesses during market upturns and nose-dives during downturns. It's why stock indices in India, the U.S. and Europe plunged, especially between mid-February and mid-March this year, and why circuit-breakers were triggered several times in recent months.

In India, the major indices lost 40% in just two months. While it might be natural to get carried away with all the noise and the herd, turbulent times like these call for more reflection, rather than panic selling. Investors in countries like India have been used to more euphoric highs over the last few years, and the losses on investments therefore now seem particularly painful.

Markets in India spiraled almost immediately into a “bull phase” in a fortnight, recovering 20% from the bottom. However, it's important to keep in mind that, by and large, market indices have rebounded and hit new highs after every previous global financial crash. So, despite the noise, this may be the time for anxious decisions to hit pause.

Shortsightedness

In 1995, Shlomo Benartz and Richard Thaler conducted a study titled, “Myopic Loss Aversion and the Equity Premium Puzzle.” The researchers asked: How much will the equilibrium equity premium fall if the evaluation period (of a portfolio) increased? In other words, is checking and re-checking your portfolio beneficial or detrimental to how well it does?

Their research found that more frequent checkers show considerably lower portfolio performance over time. “In a sense,” they concluded, “5.1% is the price of excessive vigilance.” Long-term profits can be found where there is courage to move away from the crowd — and think long-term.

On the other hand, there are those who did bottom hunting when the markets crashed and are now raking in the moola.

In essence, investors who hit the pause button (the que sera, sera group) felt that those who were rebalancing their portfolios were being myopic; on the other hand, those who were actively trying to buy and sell thought that the other group was simply being “stupid.”

However, in the end, every investment decision needs to incorporate the risk appetites and the risk-taking capability of people. Someone may have a higher risk appetite – but if the capability to absorb a huge loss is low, then wait-and-watch is perhaps a better approach than investing in uncertain times.

Overconfidence

Psychologist Daniel Crosby believes that uncertainty often leads to two kinds of behaviors —compensatory over-confidence or worst-case scenario thinking, neither of which results in smart financial choices.

While the volatility in markets during the pandemic may be partly attributed to panic, investor overreaction (which led to excessive trade volume) was certainly another cause. This is reflected in how markets have periodically surged because of overconfidence about the worst of the virus having passed.

Shortly after these surges, indices are found plunging back down again. The phenomenon is also reflected in how “experts” have been making a variety of assertions in the recent weeks, guaranteeing that investors will be spared the pain that others may be experiencing.

Overconfident people, write researchers Mao Zhang and Yi-Ming Wang, “may perceive themselves more favorably than others perceive them, or they may perceive themselves more favorably than they perceive others. (…) It is common for most people to rank themselves as better than the median.” Moreover, they note that it's also “common” for men to trade more excessively than women, and for individual investors to show more confidence than institutional investors.

This plays a significant role in market volatilities, because overconfident investors are usually quick to buy on margin ahead of a stock market crash. In the run-up to the Great Depression, the “Roaring Twenties” saw a lot of overconfidence, and several investors used large margin positions to leverage their beliefs. But this caused an asset bubble, and when the depression hit, they lost everything they owned. Indeed, they even owed large sums of money, ultimately leading to banks having to declare bankruptcy — and everybody losing.

The takeaway? Avoid overconfidence: think long and hard before buying on margin in uncertain times if you don't have the appetite to stomach a huge loss.

Faulty Forecasts

“Experts” have made an array of predictions, ranging from global economic agencies projecting India's potential economic recovery to analysts saying the global economy will bounce back in the next financial year. These forecasts assume that central banks will cooperate and offer a way out, and that currently spooked investors will react to the rescue and re-enter the market. But as we have seen in the past, people can just as easily do the exact opposite, crisis or not.

In a pandemic, the seemingly opposite behaviors of people get amplified. Everything starts to seem black and white to people, but markets and behaviors actually remain grey and complex, interacting with each other in intricate ways.

Parting Thoughts

Turbulence and downturns have causes relating to behavioral and psychological factors that are difficult to control and explain. But what's certain is that not allowing investment decisions to be fueled by emotions and biases is a wise course of action. Now more than ever, people need to get back to the basics: minimize costs, be COVID-19-cautious, and resist the urge to time markets — and the virus.

India’s Far-Reaching Tax Reform

This article was first published in GARP Risk Intelligence on March 02, 2018; Co-author: Anisha Sircar and Nitya Bodavala

http://www.garp.org/#!/risk-intelligence/market/financial-markets/a1Z1W000003Q23JUAS

The objectives of the Goods and Services Tax are clearly stated, but the implementation is complicated

On July 1, 2017, the Indian economy experienced its second historical policy overhaul in under 12 months (demonetization being the first). The Goods and Services Tax (GST), the most dramatic tax reform in the country since 1947, had been under way in parliamentary dialogues for almost a decade – in contrast to the sudden implementation of demonetization. 

Seeking to unify many central and state taxes and streamline the existing indirect tax system, GST had ambitious goals mapped out for the country’s economy.

The potential positives of GST have been well-touted: the common tax system will reduce the incidence of double taxation, lower business costs across sectors, bring India’s informal sector into the mainstream, and increase exports, benefiting the overall fiscal health of the country.

But there are several issues related to the implementation of the GST, among them: reliability of the information technology, documentation hassles, potential revenue losses, and an abstruse anti-profiteering clause.

What is GST?

The Constitution Amendment Bill for Goods and Services (GST) was passed on August 3, 2016 by the Rajya Sabha, upper house of the Parliament. A single, uniform tax levied across India, on all goods and services, GST was proposed to sew together a common market by removing fiscal barriers between states. 

It was anticipated that India’s tax structure would become more comprehensive, a common market would develop, and the cascading effects of multiple indirect taxes on the movement of goods and services would be reduced.

In theory, GST is simple. The government charges a series of indirect taxes (alongside direct taxes) to raise revenue for public expenditure. Under GST, at least ten types of “indirect taxes” are subsumed under a single system, putting an end to the hitherto several levels of taxes levied on commodities as they move through the production cycle. Taxes under the system are collected on a “value-addition” basis, at each stage of sale or purchase in the supply chain.

Impact on the Economy

GST is viewed as a game-changing reform because it impacts the structure, incidence, computation, payment, and compliance of indirect taxes, as well as credit utilization and reporting. 

Its main purpose was to eliminate the compounding effect by combining central and state indirect taxes and fixing a final tax rate, where all goods and services would fall into five distinct tax categories, and where value-added tax laws did not differ across states, thus making it less problematic for both the producer as well as consumer at each stage of in the supply chain.

Before, myriad taxes were applied at the central and state levels. After the implementation of GST, only three types of taxes are applied:

• Central Goods and Services Tax (CGST), levied by the center on intra-state supply.
• State Goods and Services Tax (SGST), levied by the state on intra-state supply.
• Integrated Goods and Services Tax (IGST), levied on goods and services for intercourse trade or commerce, imports, and exports.

Under the new system, transactions have “slabs” of tax rates, depending on the nature of the good or service. All items, ranging from agricultural and necessity goods to luxury goods and consumer durables are categorized in the five major tax slabs of 0%, 5%, 12%, 18%, and 28%. The range is from zero on items deemed as essential or necessity, 28% on goods deemed as luxury.

‘Level Playing Field’

With this system replacing the multiple-tax structure, a more uniform regime has been implemented, state-specific advantages and disadvantages are set to diminish (because smaller businesses now get to make higher profit margins, and offer lower prices than their competitors, thus “leveling the playing field”). 
The average costs of goods and services across the country are reduced with the elimination of double taxation; inflation may decrease in high-productivity categories; and commodities can easily move across the country, with reduced transaction costs and transportation inefficiencies for businesses.

An ancillary benefit is that the threshold for companies exempt from paying indirect taxes has been reduced from Rs. 15 million to Rs. 1 to 2 million, depending on the location of the company, thereby attempting to bring the informal sector into the fold of the formal sector of the economy.

Further, taxes paid by the consumer are not only structurally straightforward and transparent (as opposed to a slew of overlapping and elusive taxes), but the final tax itself is set to reduce, thereby having a positive effect on consumption and boosting the economy at large. In this way, the simplicity of the tax structure appears set to bring about greater tax compliance, increasing the tax base and, in turn, revenue for the government.

With an overall decrease in production costs, and with GST not levied on exported goods and services, India’s international competitiveness is expected to increase.

From a macroeconomic perspective, then, the long-term impact of GST on the economy seems favourable: improving efficiency, widening the tax base, narrowing the gap between the informal and formal sector, and increasing overall fiscal health.

Technology and Other Challenges

One of the hallmarks of this tax reform is the introduction of the Goods and Services Tax Network (GSTN), which records all GST transactions and is supposed to be conducive to seamless documentation, debit recording, and credit disposal.

However, a lack of timely migration into the network can be detrimental to the viability of the tax program, because the IT infrastructure is the only means to track and implement the new system.

Also, verifying and legitimizing the data provided online is a mammoth task, given its estimated 70 million users. Because GSTN has refused the Comptroller and Auditor General of India access, citing its “private entry status,” there is little scope for auditing the authenticity of GSTN information, which could compromise public trust.

Additionally, particularly in the short-term, small and medium-size businesses are facing difficulties in integrating and transitioning to the new system, in terms of cumbersome documentation requirements, complex and unaudited IT systems, and adapting to the new taxation on their businesses. 

There have been day-to-day business disruptions and revenue losses during the transition phase. And lower thresholds for tax exemption imply that a manufacturer, service provider, or retailer who did not face a tax levy, will now enter the GST network, which could increase their costs.

The fundamental drawback with the tax code is that the onus is placed on the purchaser, who is responsible for filing all documentation on behalf of the supplier, in order to acquire input tax credit. Problems could arise if inconsistencies are found in suppliers’ documentation at later stages, in which case the buyer would end up having to pay for not only his/her share of tax, but also for the supplier’s share – or be forced to pay back the tax reimbursement to the government with interest. 

This problem could be fixed in the long run by market forces, which ensure non-compliant suppliers lose out on customers; and by a government mechanism to allow customers to pinpoint such defaulters, which is expected to take effect in the future.

Finally, the anti-profiteering clause requires that businesses pass on any benefits of the changes to the final consumer. However, because of ambiguity in the framing of this clause, firms might be affected as tax authorities will be given the leeway to make arbitrary judgments about whether a business is engaged in profiteering or not.

 Simultaneously, consumers will be affected because of the lack of transparency in the ruling, giving rise to fears that political connections or corrupt practices will affect these judgments. Again, this ties in to a compromise in the public confidence in GST – a fundamental determinant of the success or failure of the new tax regime.

Course Corrections

The GST Council, empowered to oversee tax rates and regulations, and composed of finance ministers from the states and center, has been meeting monthly to take stock and propose alterations with respect to the implementation of GST. The council has lowered the rates on several items to help distressed industries and eased the burden of compliance in response to problems faced by traders. The deadline for firms to file their forms was also extended, which was welcomed as a huge relief for businesses.

While these are welcome alterations, several issues remain unaddressed. The GST system is expected to span the country by April 2018. It remains unclear how inter-state business interactions will be impacted, and industries have good reason to worry about extant as well as fresh complications. 

But amidst the flurry of documentation requirements, IT adjustments, and anti-profiteering provisions, it would bode best for the government to work to bring more clarity to the remaining grey areas and instill a stronger sense of confidence, for both producers and consumers, in the theoretically promising policy endeavor. Most strikingly, the issues surrounding GSTN and auditing the complex IT infrastructure remain a fundamental barrier to all-important public confidence.

If implemented correctly, the outcomes from the reform will reflect its much-needed economic rationale. Eliminating double taxation and multiple tax hassles, increasing efficiency, assimilating the informal sector, lowering transaction costs and product prices, and intra- and inter-state movement of goods and services could be overwhelmingly positive boosts for Indian markets.

 Perhaps with a committee to oversee complaints, a more comprehensive auditing system, more specific delineation of what is “anti-profiteering,” and more widespread educational efforts, much-needed corporate and public confidence in GST could be instilled.

The rise and rise of family firms

Though late on the scene, standalone family firms have established themselves as formidable players

This article was first published in Forbes India magazine, Issue: March 02, 2018; Co-author: Kavil Ramachandran

http://www.forbesindia.com/article/column/the-rise-and-rise-of-family-firms/49485/1

The year 1991 ushered in a new dawn for the Indian economy with economic reforms across sectors. The entrepreneurial spirit among Indians took advantage of the opportunities, and a new class of family businesses—the standalone family firms (SFFs)—emerged.

In a paper titled Family Business 1990-2015: The Emerging Landscape published by the Thomas Schmidheiny Centre for Family Enterprise at the Indian School of Business in July 2017, we said that by 2015, SFFs accounted for 57 percent of the 4,809 listed firms studied. Close to 73 percent of these were incorporated between 1981 and 1995. SFFs were, in a sense, a creation of the new reforms.

Prominence in the ecosystem

Though SFFs emerged late in the entrepreneurship ecosystem, they soon established themselves as an integral and leading player, belying worries about the potential of family firms to withstand competition. Evidence suggests that the removal of restrictions and controls led to this spurt. Several factors have shaped the destiny of SFFs.

New opportunities: Post-1991, structural changes in the economy and industry provided multiplier effects. Many entrepreneurs were either from business families or became one because of ownership structures. Reduced controls enabled the entry of first-generation-entrepreneurs-turned-SFFs into new territories.

Ease of access to the capital markets enabled them to raise funds early on. The average difference between their listing year and their incorporation year was 10.01 years, much lower than business group-affiliated firms or MNCs. 

Need for scale to be competitive: The removal of ceilings on capacity and investment, the need to improve efficiency, and scale up led SFFs to focus on a single firm with related products, services and markets. Entrepreneurs did not need to diversify and establish multiple firms to grow, as was the case earlier.

Break-up of the joint family: Historically, business groups had flourished under the ownership of joint families. The emergence of nuclear families meant there was room for next generations to get involved in the same business, without the need to incorporate multiple firms for the members of the next generations.

Unique value creation by SFFs

SFFs have long-term orientations towards success across generations; rarely is enterprise exit an option.

Most successful SFFs have a strong synthesis of entrepreneurial energy, professional discipline and organisational governance. Promoters with sound family governance provide a strong platform to build the enterprise on a rich resource pool of emotional support, committed manpower and continued purpose.

One of the compulsions faced by SFFs is to remain together for economic reasons, if not for emotional reasons.

Emerging challenges

More than half of SFFs are less than 30 years old, with the founders still actively involved in most. Many would be staring at a change of guard soon. It needs to be seen if these firms survive the change.

SFFs have to pay greater attention to their future strategy, professionalisation and governance at family and business levels. There is every chance of a well-run SFF getting into a growth trap unless proactive action is taken on strategy, professionalisation and governance. 

Un-please to succeed

This article was first published in Business Standard on October 26, 2017; Co-author: S. Subramanian

http://www.business-standard.com/article/opinion/unplease-to-succeed-117102501460_1.html

Leaders of family-owned businesses must adapt to the changing times

The role of the family business leader depends on the background of the family, its structure and the conditions under which he assumes that role. Someone who becomes the leader during times when the family and its business is struggling may face very different kinds of challenges than one who becomes a leader in a planned manner.

The challenges also depend upon the preparedness of the leader, turbulence or stability in business and the support of the family as well as the business team. While the role of the leader in the business and the family is shaped by the circumstances, almost all leaders must learn to un-PLEASE to ensure continued success.

·      Please: Allocating resources in a way that takes care of the necessities without demotivating the members, and at the same time keeping the respectability of the family and business intact. Many a times the family members may not be pleased with the decisions, but if it is in the long-term interest of the business and it must be taken, the leader should be able to convince the family members.

·      Loneliness: The authority that comes with being a leader often comes at the cost of loneliness, especially in the case of founder-promoters. The loneliness of the leader would prevent divergent viewpoints coming from different family members and next-generation members that often result in innovation, new venture creation and critical review of resources allocation to adapt to strategic changes in family firms
.

·       Entitle: In financially sound business families, it is often seen that the members or the next generation feel entitled to the business. This is especially not right for companies that have external shareholders. The competitive environment and increasing shareholder activism would not allow such entitlement. A recent example is the attempt by the Singhania family factions to get the prime property owned by Raymond Ltd. at throwaway prices that was defeated by the non-promoter shareholders.

·       Assume: The “license raj” provided continued success for family businesses due to limited competition in the markets. Hence the leaders assume successful business is in their genes. Such assumptions don’t suffice in a competitive environment. Many top business houses that were a part of the Sensex in 1990 are no longer amongst the top, like Thapar, Mafatlal, Modi, Walchand and Kirloskar.

·       Settle: During the days of closed economy, business was predictable to a greater extent. However, recent years indicate that innovation is key to survival. Companies that become complacent soon turn irrelevant. Till 2014, Micromax was a leader in low-priced phones in India. 
   It had a good distribution model that helped it enjoy a lead. In the past two years, Chinese firms like Xiaomi have dealt a massive blow to it with innovative designs, reasonably good quality phones, high-end configurations and innovative distribution at low costs.

·     Establish: In family-owned businesses, the leaders have established authority over the professional top management. The leader’s decision is final, even if it is wrong in the business perspective. Often the Board of Directors too falls in line with the leader for fear of upsetting him. A good leader is one who is able to put processes in place for fair and informed decisions to be made.

The roles and challenges of each leader may differ. However, what cannot be questioned is that he must work for the welfare of the entire family and the long-term interests of the organisation. Whether the decisions are business- or family-related, the leader must be fair to all, there should be no imbalances. In the process, they may end up displeasing a few people. As long as it is in the long-term interest of the family members and the business, it is ok to un-please at times.

Concentration: the case for putting all your eggs in one basket

This article was first published in the Financial Times, FTfm, on September 30, 2013; Co-author: Khemchand Sakaldeepi

http://www.ft.com/cms/s/0/d4e511fc-250f-11e3-bcf7-00144feab7de.html#axzz2gLgr9ACE

Is diversification the best way to invest in the market today? Not really. The portfolios of major investors worldwide make the case for another, often-ignored, strategy: concentration. Business schools need to refrain from pushing the merits of diversification without highlighting the efficacy of concentration.

“Do not put all your eggs in one basket. Diversify.” In 1952, investment aspirants received this clarion call from Harry Markowitz, a US economist and Nobel laureate. Peter Lynch, the famous US businessman and stock investor, “never saw a stock he didn’t like” and was a great proponent of portfolio diversification. While managing the Magellan fund, at the peak of his career, Mr Lynch’s portfolio had more than 1,000 stocks. To date, portfolio diversification remains the most important lesson taught to students of investment and risk management. The concept is a common thread in the investment approach of most fund managers and investors.

However, if we look at the portfolios of the rich and famous, they are, surprisingly, mostly concentrated. Several great investors, spread across geographies, have very concentrated portfolios. Warren Buffett, George Soros, Rakesh Jhunjhunwala and many others are renowned proponents of portfolio concentration. To Mr. Buffett, over-diversification presented a “low-hazard, low-return” situation and thus he dismissed it. A concentrated portfolio pivots on the absolute conviction of the investor in his or her stocks and his or her risk appetite.

A diversified portfolio, on the other hand, works well if the investor is optimistic about the stock, but wary of the associated risk. Investors like the first billion-dollar Indian investor, Mr. Jhunjhunwala, walk a fine line between the two.

John Maynard Keynes, the influential British economist, was another staunch supporter of concentration. “As time goes on, I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes,” he once said.

Mr. Buffett, echoing Benjamin Graham, the father of “value” investing, says he does not just buy an insignificant thing that bounces by a small percentage every day on the stock market. He buys part of a real business and thinks like the owner of a business would.

Mr. Buffett says: “Wide diversification is only required when investors do not understand what they are doing.” Bruce Berkowitz, founder of Fairholme Capital and a leading “value” proponent, adds that just a handful of significant positions are enough to do unbelievably well in a lifetime.

In 2012, the results of a study from the Paul Woolley Centre for the Study of Capital Market Dysfunctionality, University of Technology Sydney, showed that if skilled fund managers invested in concentrated portfolios, they would improve their performance markedly as compared with the portfolios that they would build under the compulsion to diversify. Despite mitigating stock-specific risks, the method of diversification cannot fortify the portfolio against market risks.

Advocates of concentration also opine that building or creating wealth with a diversified portfolio is difficult, unless the entire market is experiencing a bull phase and all the stocks in the portfolio are performing well. Even then, you may not get the full advantage of a multi-bagger as your investment in that particular stock would be just a fraction of your entire portfolio. The anti-diversification camp proposes that to generate wealth some concentration is required, provided people know how to assess their risk appetites and simultaneously pick winning stocks.

Fund managers today are caught in a catch-22 situation. Is wealth generated first by diversification and then maintained through concentration or vice versa? Knowing that concentration has been the mantra for success for most investment gurus, is it savvy to jump on the “diversification bandwagon” by adhering to popular belief? Awareness of such dilemmas and seeking clarity on them is essential for future managers.

It is, thus, time for business schools to introduce concentration as an important strategy in wealth creation, management and enhancement. Special attention needs to be given to this in business pedagogy, as the training of financial advisers and finance students will remain incomplete if it is restricted to the hallowed realm of diversification as the only plausible investment strategy.

Underestimating liquidity risks: How investors can suffer

This article was first published by Moneylife on January 27, 2014

http://www.moneylife.in/article/underestimating-liquidity-risks-how-investors-can-suffer/36141.html

Risk management models used by professional investors often assume that securities can be traded infinitely. When liquidity dries up, especially in a systemic way during periods of crisis, it becomes very expensive to trade.

"When there is rain, umbrellas become expensive. But when there is no rain, nobody cares about the umbrella and the prices are low. The case of Liquidity is similar", says Professor Yakov Amihud, Ira Rennert Professor of Entrepreneurial Finance at the Stern School of Business, New York University. Prof Amihud has been actively researching the effects of liquidity of assets on their returns and values, and the design and evaluation of securities markets' trading methods for over three decades.

In conversation with Dr Nupur Pavan Bang of the Insurance Information Bureau of India and Prof Vikram Kuriyan of the Indian School of Business, Prof Amihud explains that liquidity risk is often ignored by investors. Risk management models used by professionalinvestors often assume that securities can be traded infinitely. When liquidity dries up, especially in a systemic way during periods of crisis, it becomes very expensive to trade. Firms like Morgan Stanley and Long Term Capital Management have suffered huge losses due to underestimating the cost of liquidity.

So when does liquidity dry up? "It is a chicken and egg story", says Prof Amihud. When prices fall, traders with leveraged positions need to come up with additional funds. If funding is too costly, traders must liquidate part of their positions and this makes stocks less liquid. When stocks become illiquid, their prices fall further; this exacerbates the problem of illiquidity. In addition, information asymmetry is an important determinant of illiquidity. When there is overall panic and information gaps between traders widen, transaction costs go up and liquidity dries up.

The introduction of high frequency trading (HFT), algorithmic trading and technology improvements in terms of direct market access and co-location has not hurt the marketsin terms of overall liquidity. Every generation, there are some people who are more technologically advanced than the others and consequently they have an advantage over the others. In earlier times, people who had telephones had an advantage over those who did not have telephones. Then came computers. Initially, only a few had computers. Now, everyone has it.

It's not an arms race, which imposes a dead-weight cost with no benefit. For example, when both India and Pakistan did not have nuclear weapons, they were equal. Now both have it, and they are still equal, but after burning billions of dollars. Similarly, people argue that when there was no HFT every one was equal in terms of technology. And now with HFT, everyone might eventually reach there and then again everyone will be equal. So why have it? Well, by improving the speed of transactions, HFT helps improve stock liquidity. Limit orders are tighter (have narrower gap between the buying and sellingprice), which benefits all traders who can trade at lower cost. This applies particularly, to large and more liquid stocks, in which HFTs are more actively involved. The level of illiquidity and its price have declined over time. This is not an anomaly which will disappear once the market finds out about it. It will stay there and benefit all traders and the economy at large.

On being asked about liquidity in the Indian markets, Prof Amihud says that India is among the least liquid markets in the world. Ironically the corporate world would get upset if the Reserve Bank of India (RBI) would raise bank interest rates. Yet, they are not worried about the illiquidity in the securities markets, which raises their cost of capital. If the Securities Exchange Board of India (SEBI) comes out with a regulatory scheme that would make the market more liquid, it will reduce the corporate cost of capital, akin to the RBI lowering interest rates.

Investing? How to build an optimal portfolio

This article was first published in the business section of www.rediff.com on November 27, 2013; Co-Author: Lokesh Kumar (ISB)

http://www.rediff.com/business/report/investing-how-to-build-an-optimal-portfolio/20131127.htm

Lucky scratched his head. Looked around. Buried his head again in the newspaper. 

Looked up again. Scratched his beard. Got up and hesitantly walked up to the lady sitting on the far end right corner of the student lounge at the University.

She looked up at the smartest guy in her executive education class. Lucky was a successful software developer, who had made money through stock options that his company gave him for performance. Gesturing him to take the chair opposite her, she asked, "where are you lost?".

"Look at this Professor Nicky", said Lucky, holding out the newspaper to her and pointing at the article that he was reading.

"Modern Portfolio Theory: Bigger Profit with less risk", read the heading. Nicky quickly scanned the article and asked, "So?"

Lucky: I have some money as fixed deposit with my bank. It is giving me a return of 9.25 percent per annum. I know it is a very safe way to get returns. But I also know that I am not maximizing my returns.

I may get more returns by taking some measured risk. I am a bachelor. I don't need to send money home. I can afford to take some risk.

But I don't know how to go about doing it. I am comfortable with programming, but finance scares me. If you can help me understand this article and what is modern portfolio theory, I might get over my fear and get started.

Nicky: But you can go to an investment advisor!

Lucky:  Yes. But I don't want to. I have had a bad experience earlier when one of them sold me a Unit Linked Investment Plan and I lost half of my invested money. I later came to know that they get a hefty commission for selling some of the products. So now I want to manage my investments on my own.

Nicky: Well, once bitten twice shy. But not all investment advisors are bad. And now, even the regulators are tightening the norms and making it safer for the investors. Having said that, it is good that you want to manage your own portfolio.

Let me start from the beginning. Harry Markowitz, a Nobel laureate in economics, introduced modern portfolio theory, a theory of finance that shows how risk averse investors can construct portfolio to maximize expected return for a given level of risk or to minimize risk for a given level of expected return.

He developed a simple framework, known as Mean-variance analysis, to analyze the tradeoff between risk and return. To diversify the money in risky and risk free assets, the first step is to find the optimal portfolio of risky assets and the second step is to find the best combination of risk free asset and optimal risky portfolio.

Lucky: Now you are losing me. Risk free? Optimal risky portfolio?

Nupur: Risk free assets are typically government issued short term bills or bonds. Even though technically a fixed deposit is not risk free, you may consider it to be close to risk free and continue to invest part of your money in fixed deposits.

An optimal risky portfolio is the market portfolio that provides maximum reward to risk ratio; in other terms, the best combination of risky assets to be mixed with safe assets to form the complete optimal portfolio.  It can be constructed by using a simple tool, Solver, in excel.

Lucky: This article here says that there can be many minimum variance portfolios. If that is the case, then which one should I choose?

Nicky: On right track! To build an optimal risky portfolio, you need to maximize the ratio of portfolio excess return to portfolio risk (standard deviation). This ratio is known as the Sharpe Ratio. Once you find the portfolio which maximizes the sharpe ratio, you can take that portfolio and invest part of your money in it and the balance in a risk free asset.

Lucky: How will I know how much to invest in each?

Nicky: Ah that really depends upon how much risk you want to take. If you don't want to take any risk, then your investment in risky portfolio will be zero percent. But if you want to take some degree of risk, then you will invest say 30 or 40 percent of your money in the risky portfolio and balance in risk free assets. It really depends upon your risk appetite.

Lucky: Wow! And all this was told by Markowitz?

Nicky: Yes. And he said many more things. But I guess this is enough for today. If you want to know more about his and his theory, google his name and you will find his originally published paper in the Journal of Finance in 1952.