Vivek Kaul
The Mint newspaper has a very interesting article today on the finance minister’s P Chidambaram’s latest move to use the Reserve Bank of India(RBI) to help meet the fiscal deficit target of 4.8% of the GDP, set at the beginning of this financial year. Fiscal deficit is the difference between what a government earns and what it spends.
As per this plan the finance ministry is talking to the RBI for an interim payment or transfer of the central bank’s income. The RBI follows an accounting year of July to June. Given that, it usually transfers its income to the central government in August every year. Last year, the central bank had handed over Rs 33,100 crore to the government and the year before last, it had handed over Rs 16,100 crore.
But the government does not want to wait till August this year. It wants the central bank to pay up immediately, in order to contain the burgeoning fiscal deficit. The trouble is that the RBI Act does not have a provision for transferring surplus before the accounting year ends.
The government is desperate for any revenue irrespective of where it comes from. The fiscal deficit for the nine month period between April and December 2013, stood at Rs 5,16,390 crore or 95.2% of the annual target of Rs 5,42,499 crore (or 4.8% of the GDP as estimated in the budget presented in February 2013).
For the first nine months of the financial year, the government has run an average fiscal deficit of Rs 57,377 crore (Rs 5,16,390 crore/12). But for the remaining three months, it has very little room.If the government has to match the numbers projected in the budget presented in February 2013, over the next three months it can run a fiscal deficit of only around Rs 26,109 crore (Rs 5,42,499 crore – Rs 5,16,390 crore). This means an average fiscal deficit of Rs 8,703 crore per month, which is a whopping 85% lower than the average fiscal deficit per month that the government has run between April and December 2013.
One way of controlling the fiscal deficit is slashing expenditure. This is not very easy to do given that salaries need to be paid, employee provident fund needs to be deposited, interest on government debt needs to be paid and the government debt maturing needs to be repaid.
But one trick that the finance ministry has come up with on this front is to postpone a lot of payments to the next financial year. An article in the Business Standard estimates that subsidies of around Rs 1,23,000 crore will be postponed to the next financial year. These are subsidies on oil, food and fertilizer which should have been paid up by the government in this financial year, but will be postponed to the next financial year. The article points out that the government will need Rs 1,45,000 crore to pay up all the subsidies but is likely to sanction only around Rs 22,000 crore. This leaves a gap of Rs 1,23,000 crore which will be postponed to the next financial year, and will become a huge headache for the next government.
This essentially means that the government will not recognise expenditure when it incurs it, but only when it pays for that expenditure. This goes against the basic accounting principles, where an expenditure needs to be recognised during the period it is incurred. If a private company where to do such a thing it would be accused of fraud. Interestingly, even last year a lot of subsidy payments had been postponed. The American company Enron used this strategy for years to over- declare profits. It used to recognise revenue expected from the future years without recognising the expenditure expected against that revenue, and thus over-declare its profit.
That’s how things stack up for the government on the expenditure side. On the income side, the government is indulging in massive asset stripping. Since January 2014, public sector banks have announced interim dividends of Rs 27,474.4 crore. Now what is the logic here? Earlier this year, the government had put in Rs 14,000 crore of fresh capital in these banks. So, the government gives ‘x’ rupees to public sector banks and then takes away 2’x’ rupees from them.
Then there is the very interesting case of the Oil India Ltd and ONGC buying shares in Indian Oil Corporation worth Rs 5,000 crore, a company which is expected to lose around Rs 75,000 crore this year. Hence, no investor in his right mind would have bought stock in this company.
Given that all these companies are owned by the government, this is essentially a complicated manoeuvre of moving cash from the books of these companies to the books of the government. The next time any UPA politician talks about corporate governance, the example of IOC should be brought to his notice.
And then there is Coal India Ltd. The world’s largest coal producer declared a record dividend in January. This dividend aggregated to Rs 18,317.5 crore. Of this, the government will get Rs 16,485 crore, given that it owns 90% of the company. The government will also get Rs 3,100 crore, which Coal India will have to pay as dividend distribution tax. This money should actually have been used by Coal India to develop more coal mines so that India does not have to import coal, like it currently does, despite having massive coal reserves. But that of course, hasn’t happened.
Also, there is another basic issue here. The sale of assets from the balance sheet to meet current expenditure is not a great practice to follow, given that assets once sold cannot be re-sold, but the expenditure will have to be incurred every year. Asset sales cannot be a permanent source of revenue.
The UPA government has brought India to a brink of a financial disaster. The next government which will take over after the Lok Sabha elections later this year, will have a huge financial hole to fill. As the old Hindi film dialogue goes “hum to doobenge sanam, tumko bhi le doobenge (I will drown for sure, but I will ensure that you drown as well).” The UPA clearly has worked along those lines.
The article originally appeared on www.FirstBiz.com on February 12, 2014
(Vivek Kaul is a writer. He tweets @kaul_vivek)
Month: February 2014
The death of Facebook
Vivek Kaul
A friend of mine had a rather unique problem sometime back. His daughter’s class teacher had started putting their daily homework online on a Facebook page. She wanted the parents to follow that page, so that they knew what was happening in the class.
“So what is the problem?” I asked him.
“I don’t have a Facebook account,” my friend replied.
“So open one,” I suggested.
And this is when things got really interesting.
“I don’t like the voyeurism that comes with Facebook,” he said, trying to give me a reason for his reluctance to open a Facebook account.
“Voyeurism?”
“Yeah. Like you may get to see the honeymoon pictures of a couple holidaying in Goa. The irony of course is that you had not been invited for their wedding.”
“Come on, you are nitpicking here,” I tried to protest.
“No I am serious. Think about the digital footprint that you are leaving out there. And that is something that makes me uncomfortable. What if someone tags some old pictures of mine from my engineering days, where I am looking drunk or maybe even stoned? You may tell me you can always remove the tag. Yes, but it is not always possible to keep track. And given this, how will I tell my daughter in the years to come that smoking pot and excess drinking are not good for health. Also, what I write will stay there forever. Have you ever thought about these things?”
I guess my friend had a point. In fact, my mind went back to a conversation I had had with Ferdinando Pennarolla, an associate professor at the department of management and technology, Bocconi University in Milan, Italy, a few years back. Pennarola had made several interesting points during the course of our conversation about our digital lives.
“The consumers are not asking themselves to what extent their digital lives are there forever. When you write something on the internet it is written on the stone. It is forever. It is very difficult to erase things on the internet. Once you get Googlised it is very difficult to cancel or erase your news. There are many stories where people cannot erase their contribution to things like community groups and forums,” he had said.
Also, as we spend more and more of our lives on the internet the question of what happens to our digital lives after we die, comes into the picture well. We spend a lot of our time these days reading emails on Gmail, making friends and posting pictures on Facebook and telling the world at large what we think about it, in less than 140 characters, on Twitter.
Other than this we have subscribed to newsletters, articles from various websites, blogs and so on. We also have multiple logins and passwords that we have created on various e-commerce websites. What happens to all this when we are no longer around?
Or as Pennarola put it “Who will have access to all of this? Will these accounts just be cancelled because they will remain unutilised? Will the vendors still keep on bombarding our mailboxes with news and advertising? I think there is a need of an integrated service that in the future will take care of all our digital and networked life, and pass it to our loves, according to our will.”
For people like me, who primarily write for websites, there is also the question of who gets the copyright for all the writing that has been published and will continue to be published digitally. That is one part of the problem that most of us are not thinking about.
A few days after meeting my friend I happened to start reading a rather fascinating book called Who Owns the Future? written by a philosopher and computer scientist called Jaron Lanier. In this book Lanier raises many other fascinating questions regarding our digital lives that do not have easy answers.
Take the case of Gmail, Facebook and Twitter. A large portion of people who use email these days use Gmail. When it comes to social networking, Facebook happens to be the number one preference. When was the last time you logged onto Orkut? And do you even remember Bigadda?
As far as micro-blogging goes, have you even ever heard the name of any other website other than Twitter?
By concentrating our digital lives around a few companies, we are working with the assumption that they will stay around forever. But for anyone who understands a little bit about technology companies, knows that has never been the case.
“It’s sad to say, but all young things change over time. The prototypical great Silicon Valley company Hewlett-Packard, which inspired all the rest to come, encountered in the not-too-distant past a period of now only crummy management, but weird, tawdry scandals, board intrigues, and demoralization. Chances are that some of today’s bright young companies will go through similar periods someday. It could happen to Facebook or Twitter,” writes Lanier.
Lanier then discusses the case of Facebook in some detail. As he writes “Suppose Facebook never gets good enough at snatching the ‘advertising’ business from Google. That’s still a possibility as I write this. In that event, Facebook could go into decline, which would present a global emergency…If Facebook starts to fail commercially, suddenly people all over the world would be at the risk of losing old friends and family ties, or perhaps critical medical histories.”
The same argument stands true for Gmail as well. For most of us it is a repository of a large amount of information, communication and documentation, that we need to keep going back to time and again.
In that sense, these websites are becoming more like electric utilities as every day goes by. Something that we really cannot do without. As Lanier puts it “It’s a piece of infrastructure people need, and when people need something they eventually ask the government to make sure they have it. That’s why government ended up in the middle of water, electricity, roads, and the like.”
These are things that no one has really thought about, which is clearly worrying. As Lanier concludes “The death of Facebook must be an option if it is to be a company at all. Therefore your online identity should not be fundamentally grounded in Facebook or something similar.”
This article originally appeared in the Wealth Insight magazine dated Feb, 2014
(Vivek Kaul is the author of Easy Money. He can be reached at [email protected])
Shopping lesson from Calvin and Hobbes: So much selection, and so little choice
Vivek Kaul
A few months back I stopped going to the local supermarket. There were two reasons for the same. The first reason was the fact that finding a cab that would drop me home, proved to be a tad difficult on occasions in the evenings. Like the autowallahs of Delhi, the taxiwallahs of Mumbai are also a little finicky, when it comes to small distances (though I must add that this happens only in the evenings in Mumbai, unlike Delhi, where it is a perpetual phenomenon). Given this, I had to walk home on occasions, carrying the stuff that I had bought. And that was not very pleasant.
The second reason was the fact that the amount of choice overwhelmed me. It left me confused on what to buy and what not to buy. Even buying something as simple as biscuits could involve a few minutes of decision making. I figured out that calling up my local banya and getting stuff home delivered was easier.
In fact the situation reminded me of a Calvin and Hobbes comic strip that I had read a while back. And this is how the rant from the comic strip goes:
Look at this peanut butter! There must be three sizes of five brands of four consistencies! Who demands this much choice? I know! I’ll quit my job and devote my life to choosing peanut butter! Is “chunky” chunky enough or do I need EXTRA chunky? I’ll compare ingredients! I’ll compare brands! I’ll compare sizes and prices! Maybe I’ll drive around and see what other stores have! So much selection, and so little time.
But this set me thinking on whether I was the only one having problems with more choice or was there something more to it? At a basic level we call love more choice, there is no doubt about that. As Sheena Iyengar writes in The Art of Choosing “Whatever our reservations about choice, we have continued to demand more of it.”
But is more choice helpful? “An abundance of choice doesn’t always benefit us…The expansion of choice has become the explosion of choice, and while there is something beautiful and immensely satisfying about having all this variety at our fingertips, we also find ourselves beset by it,” writes Iyengar.
She says this on the basis of a very interesting experiment on jams, she carried out with Mark R. Lepper . This study was finally published under the title When Choice is Demotivating: Can One Desire Too Much of a Good Thing?
Barry Schwartz summarises this experiment in The Paradox of Choice: Why More is Less, very well. As he writes “Researchers set up a display featuring a line of exotic, high-quality jams, customers who came by could taste samples, and they were given a coupon for a dollar off if they bought a jar. In one condition of the study, 6 varieties of the jam were available for tasting. In another 24 varieties were available. In either case, the entire set of 24 varieties was available for purchase.”
The results were surprising and conclusively proved that choice beyond a point essentially ends up confusing people, rather than making their lives easy, which should be the case. As Schwartz points out “The large array of jams attracted more people to the table rather than the small array, though in both cases people tasted about the same number of jams on average. When it came to buying, however, a huge difference became evident. Thirty percent of the people exposed to the small array of jams actually bought a jar; only 3 percent of those exposed to the large array of jams did so.”
As Iyengar and Lepper conclude in their research paper “. Thus, consumers initially exposed to limited choices proved considerably more likely to purchase the product than consumers who had initially encountered a much larger set of options.”
The logical question to ask is why is that the case? “A large array of options may discourage consumers because it forces an increase in the effort that goes into making a decision. Or if they do, the effort that the decision requires detracts from the enjoyment derived from the results,” writes Scwartz.
In fact, less choice is more beneficial for companies as well. As Iyengar and Lepper point out in their study “Several major manufacturers of a variety of consumer products have have been streamlining the number of options they provide customers. Proctor & Gamble, for example, reduced the number of versions of its popular Head and Shoulders shampoo from 26 to 15, and they, in turn, experienced a 10% increase in sales.”
This does not mean that choice should be done away with completely. The lesson here is that beyond a point choice confuses rather than helping people. When people are given a limited choice they are more likely to make a choice. As Iyengar writes in The Art of Choosing “Since the publication of the jam study, I and other researchers have conducted more experiments on the effects of assortment size. These studies, many of which were designed to replicate real-world choosing contexts, have found fairly consistently that when people are given a moderate number of options (4 to 6) rather than a large number (20 to 30), they are more likely to make a choice, are more confident in their decisions, and are happier with what they choose.”
Interestingly, the rise of the internet was helped to make choosing easier. But it hasn’t. It has introduced one more level of choice. As Schwartz explains “The Internet can give us information that is absolutely up-to-the-minute, but as a resource, it is democratic to a fault—everyone with a computer and an Internet hookup can express their opinion, whether they know anything or not. The avalanche of electronic information we now face is such that in order to solve the problem of choosing from among 200 brands of cereal or 5000 mutual funds, we must first solve the problem of choosing from 10,000 websites offering to make us informed consumers.”
The article originally appeared on www.FirstBiz.com on February 12, 2014
(Vivek Kaul is a writer. He tweets @kaul_vivek)
IPL is a great example of why big brands die hard
Vivek Kaul
The Indian Premier League (IPL), the world’s biggest T20 cricket tournament, has been surrounded by controversies for a while. The latest round started yesterday with a panel appointed by the Supreme Court indicting Gurunath Meiyappan for spot fixing. Meiyappan is the son-in-law of the BCCI president N Srinivasan. Srinivasan also owns the IPL Team, Chennai Super Kings (CSK). He is also scheduled to takeover as the first chairman of the International Cricket Council (ICC) from July 2014.
This is not the first time that controversy has hit the IPL. In the past, there have been issues about the shenanigans of Lalit Modi, and how he started and ran the tournament. There have been issues about the union minister Shashi Tharoor using his late wife Sunanda Pushkar to pick up “sweat equity” in the now defunct IPL team Kochi Tuskers Kerala. Then there have also been issues about spot fixing, leading to the arrest of S Sreesanth, Ajit Chandila and Ankeet Chavan, who played for the Rajasthan Royals cricket team.
But despite these controversies, the brand IPL has held strong and advertisers have thronged to it, year on year. Interestingly, the research firm American Appraisal, in a report titled Clearing the Fence with Brand Value: A Concise Report on Brand Values in the Indian Premier League found that “43 percent of the respondents thought that the controversies surrounding the tournament impacted their new or continued relation with the IPL as sponsors or advertisers.” But more interestingly, “almost half said that the controversies in no way influenced their decision to affiliate with the tournament.” American Appraisal reached out to over 300 companies and ad agencies that are involved with the IPL.
So what is it that makes brand IPL so strong despite all the controversies that have surrounded it? India is a cricket mad nation and for any company which has a consumer oriented focus, some money to spend and a lazy marketing strategy, it makes sense to be associated with the IPL brand. But that as they say is a no brainer.
The more important question to ask here is why have the companies continued to be associated with the IPL, despite all the controversies surrounding the tournament. Niraj Dawar possibly has an answer in his book Tilt- Shifting Your Strategy from Products to Customers. As he writes “Brands die hard…One consequence of the strong association of a brand with a criterion of purchase is that even when the brand falls behind technologically or fails to deliver on the product, it continues to benefit from the customers’ default assumptions for a long while…Customer associations provide the brand with the buffer that shields it from crises and quality issues.”
The IPL brand is well settled in the minds of the Indian consumer and the controversies that have hit the cricket tournament have been unable to dislodge it. Given this ‘strong’ association of the Indian consumer with the IPL, it is not surprising that companies and their brands want to continue to be associated with the T20 tournament.
This, despite the fact that the IPL may have failed to deliver on its main product, which is an honestly and competitively played twenty over cricket match. For all we know that may not be happening, given that the owners of IPL teams (like Gurunath Meiyappan of CSK and Raj Kundra of the Rajasthan Royals) may have been betting against their own teams.
A report in the Mumbai Mirror newspaper points out “In his exhaustive and extensive report on the spot-fixing scandal in last year’s Indian Premier League, Justice Mukul Mudgal has raised suspicion about one particular game between the Chennai Super Kings and the Rajasthan Royals. While the 170-page report largely remains inconclusive over whether matches were fixed in the league, it clearly states this particular match needs to be investigated. “The Committee feels that there is enough information available on record to indicate that a further investigation is required in respect of the match held at Jaipur, between Rajasthan Royals and Chennai Super Kings on May 5, 2013,” the report says.”
Despite this, the Indian cricket fan (who also happens to be a consumer) is not done with the IPL as yet. Once a brand is established consumers typically tend to give it a long rope. As Dawar writes “Microsoft was able to retain most of its customers even through the life of the ill-conceived Windows Vista operating system, a disastrous product that would have been the death knell for a start-up brand. Apple’s reputation was barely dented despite the antenna problems of iPhone 4, AT&T’s spotty coverage, and the embarrassment of prematurely launching Siri, an artificial intelligence bot that was not quite ready for prime time, and faulty Apple iMaps. The brand easily withered these slipups.”
If a start-up would have made any of these mistakes, the game would have been more or less over for it. But that is not the case with big and established brands. Interestingly, the controversies started to hit the IPL only after the first few seasons, and by that time it had already managed to establish itself in the mind of the Indian consumer. As Dawar puts it “Customers are slow to switch, so that even if decline sets in, it is gradual allowing the company time to fix the problem and respond to challenges.”
This time that consumers give a big brand to fix itself can also lead to complacency, as happened in case of BlackBerry. As Dawar puts it “It allows managers the room they need to remain in denial about challengers and challenges. When BlackBerry sales continues to rise, even into 2012 in some parts of the world, its newly appointed CEO felt free to declare early that year, “We have fantastic devices in a fantastic ecosystem. I don’t think there is some drastic change needed.”
We all know what happened to BlackBerry after that. Consumers do give long ropes to big brands, but these are not infinitely long ropes. One day their patience does run out. Maybe, there is a thing or two, the Board of Control for Cricket in India (BCCI) which runs the IPL, can learn from this.
The article originally appeared on www.FirstBiz.com on February 12, 2014
(Vivek Kaul is a writer. He tweets @kaul_vivek)
What is common to Facebook, the telephone and the QWERTY keyboard
Vivek Kaul
Are you a Facebook addict, dear reader? I clearly am, given that I spend all my waking hours logged on to the website. On days, I am not near my computer, I keep regularly checking for updates on my mobile phone.
So what is it that makes Facebook work? My ‘back of the envelope’ theory is that the website feeds on our internal voyeurism, meaning, you can see the honeymoon pictures of a couple, who did not invite you to their wedding.
But that’s making things a way too simplistic. Or as Albert Einstein once said “It can scarcely be denied that the supreme goal of all theory is to make the irreducible basic elements as simple and as few as possible without having to surrender the adequate representation of a single datum of experience.” This Einstein quote has been suitably paraphrased as “everything should be made as simple as possible, but no simpler.”
Given this, my “back of the envelope theory” needs to be worked on a little more. So what is it that makes Facebook work? Economists have an answer and they call it “network externality”, which are basically markets “where demand for a product creates more demand for the product”. As Paul Oyer writes in his fantastic new book Everything I Needed to Know About Economics I Learned from Online Dating “A product has a network externality if one added user makes the product valuable to other users…The rise of the internet has made network externalities more apparent and more important in many ways…Perhaps the best example of the idea is Facebook. Essentially, the only reason anyone uses Facebook is because other people use Facebook. Each person who signs up for Facebook makes Facebook a little more valuable for everybody else. That is the entire secret of Facebook’s success—it has a lot of subscribers.”
This to a large extent explains why Facebook has retained its dominance despite being challenged by Google. In fact, when Google launched Google+ many experts said it was a much better product than Facebook, and hence, they felt that people would gradually move away from Facebook to Google+. But that really hasn’t happened.
As Oyer puts it “Over the last few years, Google has made one attempt after another to develop a viable alternative to Facebook. Google+, its most recent attempt, is widely touted as functionally superior to Facebook. Google+ has signed up many users, but it has not put any real dent in Facebook’s dominance. Nobody is going to switch to Google+ from Facebook unless most of her friends do, too, and it seems very unlikely that whole groups of friends will act in a coordinated fashion to move from one social network to another.”
In fact, the idea that a product’s demand is based on the product’s demand is not a new one. It has been around for a while. Take the case of the telephone. It was first patented by Alexander Graham Bell in 1876. But it took a long time to get popular.
“The demand for Facebook is essentially exactly the same as the demand for telephones. Why do you have a telephone? Because everybody else has one. It was a bit difficult to get people to use telephones at first. But each new user made the demand for phones a bit higher, because a phone became more valuable to everyone else. The same logic applied to fax machines when they were first introduced,” writes Oyer.
Another excellent example of a product that worked along these lines is the Q-W-E-R-T-Y keyboard. This keyboard was developed by two newspaper editors in the United States and sold to E. Remington & Sons company. The Remington company made adjustments to the design and popularised the layout through its typewriters. It needs to be pointed out that the QWERTY keyboard was designed to take into account the practical problems of the day.
“One noteworthy feature of the Remington design is that it avoided putting letters that commonly followed one another (such as t and h) next to each other to prevent the arms from jamming when keys were pressed in succession. Furthermore, the letters in each row are slightly offset from the row above because the arms attached to them had to go up to the paper without hitting one another,” writes Oyer.
But these features were relevant when people used typewriters (having learnt to type on a typewriter, I can vouch for this). They are not relevant anymore, when the world has moved on to computers. In fact, it is widely suggested that DVORAK keyboard layout is much better than the QWERTY layout. This keyboard tries to minimize the distance travelled by fingers and at the same time tries to “make the typist alternate hands on consecutive letters as often as possible.”
But QWERTY keyboards continue to be as popular as they were. As Oyer puts it “Once it became a standard, everyone wanted to use the QWERTY keyboard because that’s just what everyone else was already doing. The QWERTY keyboard story must make Facebook executives very happy.”
Given this, it will not be easy for a product which is similar to Facebook to break its monopoly, even though it may have features that make it a better product overall.
The article originally appeared on FirstBiz.com on February 10, 2014
(Vivek Kaul is a writer. He tweets @kaul_vivek)