Public Sector Bank Mergers

Why is it decided to merge banks?

Government promised a capital of Rs. 70,000 Cr. to the banks. Instead of making thin payments to multiple entities, it can disburse relatively large money to only few, but strong entities. That way they can start lending and reap the benefits in long run.

Mergers

Why this combination?

It was the core banking technology that made the combination for mergers. Canara and Syndicate Banks run on iFlex Core banking while Indian Bank and Allahabad Banks run on BaCNS making the transitions smoother. The remaining 6 banks runs on Finnacle CBS platform, but Government opted not to merge all 6 of them into one, as it would be really tough to manage such a large entity. So it opted to merge three entities each into two.

Why Now?

One can only assume that banks like Bank of Maharashtra are not touched for now with state elections around. In fact, the proposal for mergers by finance minister was announced exactly before the GDP numbers were made public. GDP growth numbers for Q1 showed a six year low. It is indeed a tricky time with growth declining in few of key sectors in turn rising unemployment numbers. However government was working on this for past 6 months. It seems it was Narasimha  committee in late 1990’s who proposed merging strong banks and dissolve weaker banks. Of course, it would be a risky step for any government to shutdown banks with lot of opposition.

Areas to watch

Bank employees’ associations are protesting saying the timing is not right to proceed with merging and are implying merging as closure of banks that deflects the interests of many bankers. While this may not be completely right, there are two areas to watch out.

  • The recapitalisation of Rs 70K Cr should make a difference at ground level. Nationalised banks are loosing their market share in incremental business, incremental deposits, credit market.
  • A strong governance in the nationalised banks. Many times, certain personnel are appointed at board level with government nominations. There should be minimal influence of pushing political agenda during key reforms at board level.

In summary, with an intend to strengthen banking sector, yet another aggressive step by government, let’s hope this move transforms our banks to a global level.

India’s strategic win at UNSC

Inspite of slight tense situation created by our strategic partner Britain, India is able to convince United Nations Security Council that the situation in Kashmir is normal and there is no need to assume any panic.

(Source courtesy : Wikimedia Commons)

Nearly after 54 years, UNSC has Kashmir as a topic of discussion. This meeting was called up by permanent member China and its ally Pakistan claiming havoc in Kashmir after revoking article 370 in Jammu and Kashmir. Pakistan has earlier wrote a formal letter to UNSC for a meeting on Kashmir. UNSC declined an open formal meeting but agreed for a meeting close doors where all the details are not to be made public.

With China backing its move to bring in Kashmir as an international dispute, Pakistan made a final attempt to get US buy-in on Friday. However US, Britain, France and Russia has ruled in favour of India saying Kashmir remains a bilateral issue between India and Pakistan and this cannot be ‘internationalized’.

An anxious moment raised when Britain agreed China’s proposal that an informal outcome to be notified through UNSC president. This could mean that a statement be issued on Kashmir’s situation by UNSC. However eventually 4 out of 5 permanent UN members denied any intervention on Kashmir. India has been appraising the circumstances and on going normal situation to 5 permanent and 10 non permanent members from the day article 370 was revoked

Key events impacting Economies in 2018

Today’s article in ET by Reshmi Khurana and Probal Dasgupta has given a clear insight on key political events that could affect global as well as India’s economy.

With his unconventional leadership style, Trump is redefining US relationship with rest of world, especially with Russia, China and West Asia.

Analysts say, China is all set to fill in any leadership gap that US could not, in global politics. For instance, China is expected to oppose Trump’s move to decertify Presidents Obama’s nuclear deal with Iran in 2015. With support of EU and Russia, this could strongly help represent China’s position as global power.

United Nations Headquarters
(image courtesy: flicker.com)

US and Russia has different positions in West Asia. US stand to declare Jerusalem as Israel capital has raised tensions. China has already announced it intent to play a role in resolving the dispute, signally itself as a global peace broker. With Russia supporting China here, this would bring both these two countries politically closer. Not sure yet on US sanctions on Russia, but this would also have impact on Russia’s undersea Nordstream pipeline between Germany and Russia. This in turn might strangle the ties between US and EU.

With US supporting Japan and India w.r.t trade in India Ocean region, where China is strategically to start dominate the region, the global relations among these key super power countries would define the economies significantly.

North Korea would be another key flashpoint in 2018. With countries 70th anniversary and South Korea hosting Winter Olympics any aggression on either side would have high impact globally.

Other key event happening is Brexit. While there are still couple of years to see its full affect, things like reduced immigration etc have started showing the impact. With reduced availability of technicians and skilled labour from other EU areas, the labour cost is increasing in UK.

In Summary, 2018 looks to be a crucial year in defining the global economies

(feel free to provide your views on kalyan.salehundam@yahoo.com)

India’s current foreign relations

The dynamics in global relationships are changing frequently. Some have been favourable to India and others are posing challenges for its growth.

India ensured a clear approach on West Asia policy. A combination of investment, defense and security, counter terrorism was understood with Gulf Arabs and Iran. This is done tactfully, while maintaining a a special relationship with Israel. The crown prince of UAE, will be India’s chief guest for Republic Day 2017. Maintaining a deeper relationship with Gulf countries should help further weaken their current unhealthy relation with Pakistan
Leaders

(image courtesy: Indianexpress.com)

Africa is India’s maritime neighbour separated by Indian Ocean. With huge resources and opportunities evolving, African countries would be definitely a strategic and economic partner to India.

With active participation in Naval exercises and making this years Nuclear deal, India has made a very progress in strengthen the relationship with Japan. It also started passive support to other countries along with Japan in keeping tab on China’s aggression in south China Sea.

Key nations has always been curious about Trump’s strategy. Well, with India it seems to be have positive till now. His ‘remarks’ till now placed India in a comfort zone, also considering his remarks for Pakistan and China. The only thing that is bothering till now is on the visa’s and its impact on IT industry. Experts has given mixed opinions on it, but India need not worry on it immediately.

Relations between Russia and India peaked in October this year after the annual summit held in Goa. Russia has been a reliable partner in defense, nuclear energy. However instances like Russia’s strategies supporting Taliban to check Islamic State would hamper the relationship.

It is quite evident that Pakistan has been one of the biggest threats for India in the area of terrorism. While India can make certain aggressive steps like in Indus Water Treaty, it will have implications. With new man as GHQ, India can wait and see on how Pakistan’s next step.

China has been India’s hindrances for economic growth. At the same time we rely on China on many areas, how India deals with China in 2017 will determine its own global rise.

With alliances and relationships getting complicated globally , India should be cautious choosing its strategies.

(Analysed from Indrani Bagchi, TOI, Stanly John from TheHindu,NILOVA ROY CHAUDHURY, RIR sudanvisiondaily.com)

GST – What Next?

Much awaited “one nation, one tax, one market” came to reality with RS passing the GST bill last week. The next steps include

  • Get the CAB (constitution amendment bill) approved by at least 50% states
  • Create a GST council
  • Concluding the Center GST and State GST rates with cabinet approval
  • Training, documentation, digital (IT) readiness

GST.001

While implementing GST is noted as a historic economic reform like the one in 1991, let us see the challenges with each of the phases mentioned above:

  • Get the CAB (constitution amendment bill) approved by at least 50% states, generally called as ratification. GST being a revenue loss on certain items in some states for a brief time, they would like to have an assurance from centre on the compensation. 16 out of 31 states should approve the CAB to proceed to next phase. 11 states including BJP ruling will approve without any problem. Other states like Andhra Pradesh, Telangana, Kerala, WB, Tripura would support the ratification. The whole process looks to be completed by September 2016 with all the support.
  • Creating CST council: GST council is very much needed that will decide the GST rates. Here comes the crucial part. Many states where they see the rates will hamper their revenue as compared to pre-GST era would raise concerns and this may delay the GST rollout. The council once formed will resolve these disputes. The rates would be as low as 12% for essentials, and as high as 40% for luxury items. The council will exclude both petroleum and alcohol items from GST for now (it is simple – the tax revenue from alcohol for some states is high. Including that in GST will benefit the alcohol prohibited states or states with low revenue from alcohol. It is wiser not to include in GST. Also similarly electricity and petroleum are also been considered not to be included).
  • Rolling out the GST: it is expected to be rolled out from 1st April 2017. If the challenges expected are resolved in time, we are good by next year.
  • Training, documentation, digital (IT) readiness: Infosys is working on the IT infra for GST. Tax officials may have to now deal with simpler tax calculations, but transition from older to new one can be tricky and government is creating a strong transition mechanism.

 

How will GST work in India

Let us begin with the understanding of how taxes are applied before VAT came into picture.

Consider this flow of a product: Manufacturer -> Retailer -> Consumer
Say the initial price is 100 and sales tax is 10%. Then

  • Manufacturer sets the price at 100 +10% =110. (Tax is 10)
  • Say Retailer adds 390 as his costs and profit making the product value 500. He then sets the price at 500+10%=550 (Tax is 50)
    The consumer buys at 550 where in he payed 50 as tax.

GSTVAT

From the year 2005, the above sales taxes are replaced with Value added Tax (VAT). With VAT, the consumer actually pays 40 as tax instead of 50. VAT=output tax-input tax i.e. 40. (50-10).
VAT is imposed by state governments and vary from state to state.

Service Tax

In addition to VAT most of us are aware that a service tax is applicable in many service industries like restaurants, travel, insurance, phone bills payments etc. This is imposed by central government.

GST (Goods and Services Tax)

GST is uniform tax imposed on any sales, manufacturing or goods & services at national level. This tax will substitute all other taxs imposed by state and central government. (Exports and direct tax like income tax, corporate tax and capital gain tax will not come under GST).

Why GST is better than VAT

  • VAT is imposed on only goods whereas GST on both goods & services
  • GST is a uniform rate in all the states and is imposed by center where as VAT varies from state to state.
  • In case of VAT, input tax credit (i.e. calculation of output tax – input tax , 40 in the above example) is applicable on only goods sold within the state whereas incase the of GST this is applicable across country and also applicable on the services too apart from goods.

GST will overcome the above three limitations of VAT.
GST will create a common market across states. It eliminates complexity of different taxes. It is beneficial to consumer. It will ensure a transparent and neutral way to raise revenue.

Why is GST opposed in Parliament?

However, GST has it own negative aspects. As GST imposed by center eliminates all the other taxes imposed by states, It is like parent asking a child to stop earning and instead giving him pocket money. Child looses his financial independence here.

Hence to have some financial independence, the current GST bill proposed by BJP excludes Petroleum and Alcohol – revenue generating sources for states. Also a 1% inter state tax (for manufacturing states like Maharastra, TN, Gujarat that fear loosing more if GST is imposed)

Currently, the GST is been opposed by Congress on three grounds.

  • A 18% cap should be made a part of constitution, ensuring consumers does not end up paying based on mood of central government. But, BJP feels that this could flaw the syatem as goods like Luxury products are supposed to attract higher taxes.
  • 1% additional inter state tax to be removed to provide an equal advantage to all states
  • Formation of a GST council that will decide on any GST issues based on majority. Congress says to have 1/4th vote weightage to Center and remaining 3/4th to State. However, BJP wants it to be 1/3rd and 2/3rd

Conclusion

In summary, GST bill is designed to replace more than dozen state taxes to a single uniform central tax proving a single market. Removing complexities, to raise revenue in a nuetral way

 

Cloud is benefiting Microsoft, Amazon, Google

It is easy to rent access to computers for a monthly fees rather than buying them and maintaining them for a lifetime. Cloud has proved to be a profitable business for Microsoft, Amazon and Alphabet as large enterprises shift to Internet-based services to host and manage their data. (Alphabet – parent company of Google). These 3 companies excelled their profit estimates for the last quarter with major contribution coming from cloud computing services they offer. On the contrary, technology companies like IBM, HP, EMC (will be merging with DELL) etc. are seeing a downtrend with decline in sales of their traditional hardware, software because of the cloud providers. Google, Amazon and Microsoft provide their computing services to many companies who are eagerly seeking for low cost alternatives. Otherwise those companies would have gone for traditional hardware, software from HP, IBM.

Kalyan_ Cloud

While many firms try providing cloud services in the market, winning in cloud is not for everyone! Amazon, Microsoft and Google invest significant sums to build huge, so called state-of-the-art data centres. “Developing a data centre infrastructure along with the required marketing and operations support is simply beyond the reach of all, but to the companies like Amazon, Google, Microsoft” says chief analyst John Dinsdale from Synergy Research Group.

Many of the Indian IT companies like TCS, Infosys, Wipro are already focusing in the digital and Cloud computing services partnering with companies like Microsoft. Indian IT companies are seeing a reduction in larger deals from customers who traditionally rolled out tenders of hundreds of millions of dollars, but they are many transactions from customers in lower value deals linking with Cloud and digital. Like Google’s CEO Sundar Pichai said “Every business in the world is going to run on cloud eventually” let us see how it rains dollars!

Please refer to Bloomberg, The Walls Street Journal, tech.firstpost.com, Forbes for more details.

German Chancellor’s visit to India

German Chancellor, Angela Merkel lands in India this week for a three day trip. Needless to say, Chancellor Merkel’s visit is of great significance. She is not only accompanied by her elite cabinet ministers, but also by a large delegation of business leaders.

With 21 billion $ worth of trade, Germany is the top trading partner from EU. And there is still scope for expansion. Today there are around 1,700 German companies in India, creating 4 lakh jobs. Germany needs IT skills and India needs technology, to create more jobs. The major agenda that India is seeking is in manufacturing, infrastructure, vocational training and renewable energy. We, India is a fast growing economy with 7+ growth rate and we need a large amount of foreign investment. With the new policies, thanks to our new government, our Indian economy is opening up as never before. The recent visits by our PM to various nations highlights this. There is a significant relaxation in caps on FDI in key sectors.

India-Germany(Picture courtesy : indiatoday.intoday.in)

Infrastructure:
With Metro rail projects, Smart cities, Speed railways taking into shape it is vital that we have the support of German technology. German companies like Siemens are there from Decades. Companies like Deutsche Bahn can help us in developing high sped corridors. It is only about how well we reform and utilize their expertise.

Manufacturing sector:
The ‘Make in India’ providing huge potential, India is keen to parter in manufacturing sector. Indian government is driving hard to on the ease of doing business. German companies that are already make in India have brought their global business networks and advanced technologies.

Vocational Training:
Vocational training is used to prepare for a certain trade. It is all the training needed for a certain job especially Auto repair, plumbing etc. Germany is eager to provide its expertise in modernisation of the apprenticeship system and supporting in Small and medium enterprises. (http://thekalyan.com/2014/12/26/small-and-medium-enterprises-smes-are-key/)

Renewable energy:
Germany sees an opportunity to partner with India in development of solar power on rooftops in cities in India. Forecasts show that India plans to add 175GW of renewable energy in the next seven years. (our non renewable energy is 195GW for only 2014-15). German cooperation on in this aspect will be a great asset.

Clean Ganga Project:
It is also an opportunity for India if we can get the expertise of German’s having cleaned up Rhine River that was in the same state as Ganga now.

In conclusion this visit is an opportunity for India in many economic aspects.

(Analyzed from dw.com, financial express, yahoo news Indiatoday)

Global Slow Down – Silver Lining for India!!

While most of the articles in the news from the last week are on global slow down of economies including India, many say there is a sliver lining, as far as Indian economy is considered.

Some facts before we proceed: India has lost only 3.7% of total loss of $12 Trillion as compared to 41% China’s 21% US’s and 14% Hong Kong’s. While most of us know the root of this crisis is China, looking this from another angle many say it is an opportunity for India to benefit from the China crisis.

Global meltdown

How is India better than China?

  • Cost of doing business in China is going up as compared to in India
  • GDP growth trends for India shows an increment and a decrement for China.
  • There is little room for China to absorb money from public investments, where as India can absorb trillions just through infra
  • China’s working population is aging, where as India youth population is increasing
  • Domestic products and services consumption % in India is much higher than compared to China. This acts as a cushion for India’s economy during global crisis.
  • China’s debt has gone to alarming levels of 101% (from 2007-14) as compared to 5% of India’s. This gives India a better chance to take more debt for growth and development

Silver lining:

With the above scenarios foreign investors are looking up for India. They want to invest and produce in India. For years, India is fuelled by its domestic demand (except the IT sector), unlike where China sells its products abroad. India has good scope for attracting global investors during this time.

Factors favoring India:

Another key point to note here as compared to our counter parts – Brazil, Russia and South Africa, India has ample international reserves and is not highly dependent on foreign capital to fund imports.

India is also currently benefiting from lower oil prices, as 75% of its consumption is imported. Foreign exchange reserves are increased by 13% and inflation is halved from last year and commodity prices are declining. Current account deficit is narrowed to very large extent.

While there are negative areas like rupee depreciation that impacts FII inflow, Falling exports, high bank NPA’s (Non performing Asset: Once the borrower has failed to make interest 90 days the loan he took, it is considered to be a non-performing asset. This impacts banks because their major income is loan)

So what should India do?

Undertake the important structural reforms and ease the domestic bottlenecks.

Simultaneously US investors are looking at reforms in Patent laws, retro taxes etc. and India in total taxation etc.

  • Patent laws:
    • India has right to revoke a patent of any multinational company if it proves it’s only a minor modification of existing drug. Many multinational organizations claim that the new version though minor should be patented.
    • India currently has law that can grant a ‘compulsory license’ to any drug organization to produce a third party patented drug in order to make it affordable to 1.2 billion populations. Many multi nationals are not encouraging this as they loose profits.
  • Retro taxes: Amendment in the Income tax and made effective from a back date, especially for foreign transitions. This might be fatal for some multinational organizations that did not pay tax earlier as per the law that time, but will have to pay the tax now.
  • Totalization agreement: Indian professional working in US, pay their Social security taxes but they will not be able to reap that benefit as many of them don’t work for 10 years or retire in US. India is working with US in getting these taxes directly paid to PF fund in India so that Indians get the benefit once they return India.

In conclusion:

In summary it is right time for India to make right reforms and get the benefit out of global slow that that helps India economically dominate the next two decades in the way China dominated the last two.

-Data analysed from ET, NDTV, The Wall Street Journal, the guardian, ictsd.org and change.org

Changes in Indian IT industry

There are couple of articles recently in ET, Business Line on the challenges our IT industry is currently facing. Due to a steep fall in the crude oil prices in previous fiscal, IT investments by clients in the energy vertical have delayed, reduced and some are cancelled. Telecom services providers are also not doing well and hence the revenues from those accounts had a hit. Also there is this cross currency impact While there is stagnation/decline in the incremental revenues of IT majors like TCS, Wipro, Infy, HCL for the last year we should also understand the drastic changes in the way IT business is undergoing.

IT Companies

Unlike previous times, there are many small firms who possess consulting capabilities and are able to sustain in the market by having a kind of conversations clients want. While all IT majors have strong consulting capabilities, the technology is changing at a drastic level where IT majors are having challenges to go to customer and say “this is what your business problem is, and we can solve with this ‘new’ technology”, says Forrester Research.

Let us speak about Cloud. Well, Cloud is not a new technology at least when we see time vs technology changes, but the business strategies associated with cloud are changing. Cloud is gradually disrupting the enterprise software and hardware industry by being easy to scale up the infra and being cost-effective. It is making computing services / resources available on internet. Cloud makes infrastructure like Storage, Servers, networking as a service. This reduces the infrastructure maintenance needs, and, hence, infrastructure services will reduce. Mid-range clients who don’t have huge infrastructure prefer cloud-based systems. This will hamper the sections of infra business in IT companies.

At the same time automation and robotics are also booming along with cloud. With burst of new technologies and delivery models there is high competition in pricing too.

However, there is still time to adapt, experts say, irrespective of new developments though the changes are drastic. At the same time client relationships matters over the price. Again IT majors have their plans in place. Wipro and Infosys has already made large acquisitions/investments in automation companies, and in startups. ET says Wipro is planning to improve the efficiency and bring the reduction of 30% in it headcount in next three years by investing in automations and artificial intelligence and digital technology. Infy CEO Sikka too mentioned “New areas in Infosys of automation and innovation will constitute a tenth of total revenue by 2020.” TCS has its own innovation Labs.