Sunday, September 28, 2014


The IIP July data has taken everyone by surprise. After a robust showing for the last 3 months, there was a dip in IIP index in the month of July. The IIP index fell to 0.5 percent as shown by the
official statistics. It should be noted that June month had shown a growth of 3.9 per cent. The data had been revised upward from 3.4 per cent stated earlier. The growth of the national economies is measured through gross domestic product, which measures performance in manufacturing sector, service sector and agricultural sector. To get a detailed view of how the economy performs one needs to have a bard’s eye view of these sectors which could be interpreted and analyzed through different sets of data. In India the performance of industrial sector is captured with the help of the industrial production index, referred to as IIP or Index of Industrial Production. It is a monthly data that measures the performance of the industrial economy. Hence, the data is used for gauging the growth of the economy in the short run. The base year used for the index is 2004-05. Though it has been changed numerous times in the past, there is a demand to change the base year to 2011-2012.
A fall in IIP numbers indicates that the industrial economy is facing a downturn. Industrial sector data is an important indicator of supply side growth in the economy. The fact that the industrial
sector data shows a meagre growth of 0.5 per cent points to the supply side bottlenecks. In other words, it means supply is not picking up as was expected in the given period.
Capital goods data indicates low investments 
Though July numbers were disappointing, some experts attribute it to the base effect. Notwithstanding, the fall in capital goods segment is really worrisome. The growth in the segment fell from 23 to -3.5 per cent . This figure indicates the total amount spent on buying machinery which augments production. Hence, this figure is indicative of the future expansion plans of the economy. It can thus be used to gauge sentiments of the economy - the direction in which it is moving and why. According to the RBI governor Dr. Raghuram Rajan, the growth of the economy, to a great extent, depends on investment growth. The capital goods figures are indicative of the investment growth. Hence, a fall in the numbers is indicative of the problems the Asia’s third largest economy is facing. The fact that the numbers are below the level in the base year does not help matters either. Hence, efforts are required to improve this number. Many a times high interest rates may dissuade companies from expanding business, which could also be a cause for the fall in July IIP numbers. Another reason could be postponement of investment by many companies, given that several banks are planning to take action against erring corporate borrowers. Given this gloomy scenario, there is a need for bringing in structural changes so as to improve the capital goods expenditure.
Core sector growth muted The core sectors are the most important constituent of the IIP number. They have a weight of 38 per cent in the total IIP index. This quarter the core sector has seen a fall from 7 to 2 per cent. The contraction in the size of its constituents led to the fall. The fall in the infrastructural index also does not augur well for the economy as the economic growth is impacted by infrastructural support provided by the eight industries which form the core sector. However, according to experts and analysts this low growth can be attributed to continuous increase in core sectors such as electricity and steel. It is believed that these sectors could see growth form hereon.
Consumer goods surprise
Consumer goods refer to the goods to be consumed by individuals. Hence, consumer goods
are an important demand side indicator. A fall in consumer goods by 7.4 per cent shows a negative sentiment during the given period. There seems to be fall in both supply and demand side which does not augur well for the economy. This is followed by a fall in consumer durables and non durables too.
Expected reaction by the RBI
RBI is expected to continue maintaining status quo (on interest rate front) and would not like to react to the given situation as these numbers seem to be out of synch with the bigger story. The
GDP numbers of the last quarter as well as the BOP position seems improved. Hence, reacting on these numbers would not make sense. Moreover, the reliability of IIP numbers is also debatable.
Therefore, it is advisable to wait and watch if there is any upward revision in the data.
Government policies and IIP number
It should be noted that the government at present has not made any structural changes in the economy. However, earnest attempts are being made to iron out bureaucratic inefficiencies in the system. These attempts would take time and hence it is not expected to yield results immediately. Having said that, structural changes are of paramount importance for the development of the economy and efforts should be made to increase the efficiency and efficacy of the
system by bringing more transparency in the system, making policies irreversible and homogenous across states. Also, as the IIP numbers show the short term sentiments, they cannot be used
to judge the long-term sustainability of the policies which have been introduced by the government. Hence this data should not be given too much of importance in terms of long-term growth.
Major challenges faced in improving IIP data
• Consumer Price Index continues its northward journey The wholesale price index is under control. However, price level for consumers keeps increasing persistently. This increase in price levels would stop the RBI from lowering interest rates which, in turn, would impact the investment climate in the country, thus muting future growth prospects as capital goods numbers
would decline.
• Volatility of IIP data 
The IIP data is highly volatile. It keeps on fluctuating regularly. This fluctuation in the value would tender the data unusable. The reliability of the data is also being questioned consistently. The revision of data adds to the woe of decision makers. Hence, it is imperative that steps should be taken to make the data more robust. The long standing demand of converting the base year to 2011- 2012 should also be implemented.
• Supply side bottlenecks
There are supply side and bottlenecks, which have hurt growth for long. To tackle them, the
government is needed to invest heavily.

Going forward, a lot is being expected from the BJP government  at the helm. They need to make sure that the investment increases in the long run. Development without structural changes is not
achievable and the government must go all out to bring in the same.

Note: This article expresses my view on IIP July data released in September published first in Global Analyst October edition.

Saturday, September 20, 2014

"Jugaad by Uber, scorned by RBI" - Right or Wrong

India is known for Jugaad and innovation. However, the Indian regulators such as RBI are not known for appreciating the jugaad or innovation by players who innovate.  Uber, a cab company seems to be at the wrong end of the stick. So what happened, and how. 
Uber's Entry into India :
Uber is an online platform that acts as an interface between passengers and taxi drivers. They operate through a smartphone which facilitates internet booking for passenger.
 The company entered India in August 2013 via Bangalore. (more on their entry can be known through the preceding link.) They were already present in around 40 countries.The main reasons for the company to venture in India was fragmented unorganized market and low entry barriers. The market was dominated by few players such as Meru, orange cab, and green cab . The company operates in the high end segment where there are very few players in the country. The cars available on rental include luxury cars such as Mercedes, Audi etc. The company derives strength from huge financial muscle that it derives from investors such as Goldman Sachs, Jeff Bezos (the man behind Amazon) and Google Ventures. 
Major Challenge for Cab Industry in India:
The major challenge for cab industry in India is customers cancellation rate at last minute . This has also lead to strikes at leading companies such as Meru. (Last minute cancellation impacting drivers morale) . Cab Companies have been trying different methods such as allocating pick ups only 20 minutes drive from drivers residence, however these methods cannot work always due to practical challenges. Then entered Uber, taking advantage of a loophole in the system they came with a novel solution. 

Solution through JUGAAD: 
All the payments were to be made online and no cash payments were accepted. It was made through a foreign gateway hence the two step authentication which is mandated by RBI was circumvented. The payments were to be made as soon as the person stepped out and hence the company could now conveniently charge for cancellation of cabs too as payment data was stored in advance. This made both the company and the drivers laugh all the way to the bank. However, it created an uneven playing ground leaving the traditional Indian cab companies complaining about not being able to charge for cancellations.

RBI's Action and Reaction thereafter
RBI has disallowed payments gateways from foreign countries from being used in India.   Thus companies such as Uber are in a fix. There is a lot of hue and cry from supporters of free economy including economists such as Ajay Shah who in his blog entry Uber versus RBI ( )
 has denounced RBI as being dictatorial in it's approach and not helping free economy to function in India. His example of Uber helping save millions because of few minutes saved in payment process appear highly stretched. In India we waste a lot of time due to roads being non existent and public transport system failing. Hence a few minute here and there involved in making payments will not make too much of a difference. On the other hand average speed of internet is surely on the lower side and everyone does not have internet access on their mobiles. Where, technological literacy is low and technology usage is on the higher side as a customer we do expect the regulator to play a proactive role in  protecting our interests.

To add to this India is not the only country where Uber is facing stiff opposition. Even in countries such as Germany and South Korea Uber has run into problems with the authorities. When it comes to payments online I agree it is difficult to make regulations that satisfy everyone. However before making any radical changes to the existing regulations it is important that we are able to regulate based on existing norms. So I do not find anything wrong in the action taken by RBI.
The Way Forward:
The company needs to change their business model going forward if it wants to continue to function in India. According to media reports the company would most probably continue to operate in India however the payment gateway would have to shift to some Indian gateway such as PayTM. This would lead to following the 2 step authentication process which might increase the "waiting time" and hence the inconvenience for the customers.


Monday, September 15, 2014

Will Pro Kabaddi Franchisees make money

Every sports worth the name seems to have a pro league in India which has commenced or will commence soon. These games include cricket, football, hockey badminton and lawn tennis.Now the question that need to be asked is do these leagues just have prestige value or can they make money too for the franchise owner.

 The common wisdom has it that "pro-leagues do not really help create money for the franchisees" but it does help create mileage for  businesses and individuals who are looking for brand name for future. What if there is a popular sport where players are available cheap; the game is exciting and the audience can relate to the team and above all there are brand icons associated to add glitz and glamour to the game. So kabaddi seems to be the answer.

Here are some facts about the pro kabaddi league that would help the game become popular:
  1. Audience in India can relate to the game easily as it is a popular game in India.
  2. The prokabaddi is fast paced and can be finished in 40 minutes hence it is short and exciting.
  3. The space required for the game is lesser compared to other popular games such as cricket and football.It is popular among both men and women hence couples watching matches together would bre more common.
  4. Mashaal sports the brain behind pro kabaddi is run by Charu Sharma who understands the sports industry well and Anand Mahindra who is an astute businessman who can monetise these opportunities well.
  5. The support of a strong media partner in the form of star sports adds strength to the whole process.
  6. The owners of the teams are all brand icons in their own right. This adds to the who process.
  7. With a nationalist government at the helm of affairs the government support could also come in if the game attracts the requisite critical mass. 
Following is the business model of kabaddi: :

  1. Revenue: The major sources of revenue for the company includes sales of tickets for home matches, sponsorship, memorabilia, share of advertisement revenue and share of  stadium revenue.
    • In the first season the major source of revenue was sales of tickets. The last leg saw full house. 
    • Revenue from advertisements and sponsorship were on the lower side. this edition. However, going forward with the reach estimated at 218 million it is expected that the revenue from advertisements and sponsorship would increase in the March edition of the event. One fourth of the total viewership could be attributed to age group 15 to 24. Hence, the growth of revenue through advertisements targeted at this age group is expected to increase.
    • As the popularity of pro kabaddi increases the icon players could help generate revenue for the game through sales of memorabilia going forward.
  2.  Cost: The major cost drivers for pro kabaddi league teams include player acquisition cost, license fees, transportation and lodging costs for players.
    • To promote the game the pro kabaddi franchisees have been able to acquire the teams at token price only.
    • As the game is not rewarding financially for the players traditionally, the whole team have been bought at INR 60 lakhs. Hence the cost of acquisition is extremely low.
    • The other major expense is travelling and lodging cost.
Looking at the low cost structure it can be deduced that the investors in pro kabaddi league can breakeven in a short period. It is estimated that the franchisees will break-even in three months compared to fifteen months in case of the bellwether IPL cricket league.