The wealth and vice of IPL: Free Press Journal 29th April 2023

 The IPL drama has upstaged the pioneering effort that was called the Packer circus which transformed the economics of cricket in the late seventies. Cricketers are now bought and sold on an annual basis and could resemble our traditional cattle fairs. The stakes have increased and the landscape has widened giving a plethora of cricketers to get commercially paid. Kerry Packer had started it with the 50-over format with coloured clothing and white balls. IPL has shortened the same with the 20-20 format and brought back the cheerleaders who were missing in other coloured formats.

Interestingly what started off as a series played with all top global cricketers being chosen by different teams, has now watered down to more people from the mofussil who may never get to represent India but will retire wealthy after, say, ten seasons. In a market system whatever is accepted is fair. But is there more to it?

The money involved is mind boggling. For the 2023 season individuals got paid as much as Rs 18.5 crore which is close the winning teams’ reward. At the lowest level one could get Rs 20 lakhs which is also good as it works out to around Rs 10 lakh per month considering the series is on for two months.

Next the total brand value of all teams put together can get close to Rs 1 lakh crore as the tournament now has 10 teams competing. The total media rights has gone for close to Rs 50,000 crore for the next 5 years which is impressive. More than the TV rights, it is digital which will be the way to go in future. The viewership is hence all-encompassing, with the entire nation glued to the screens. The stadia appear to be fairly full for all the matches being played.

The remarkable thing about the 2023 tournament is that the old order has indeed changed yielding place to new. The foreign players, who added gravitas to the tournament to begin with have retired or moved over to being coaches. Therefore the list of the foreign players today is one which will evoke the question — which country does he play for? Most of them would probably never make it to their national squad or remain at the periphery. The same holds for Indian players given that there is too much talent on display but the national team is prone to stickiness in terms of players. But what domestic cricket like Ranji and Duleep trophies have never managed to achieve has been attained here with ease as the stadium appears to be reasonably full with the audience closely associating with the local team even though the players may not belong to the state. A true sign of national integration.

But there is a dark side to this narrative which always goes when so much money is involved. First at times it has been seen that there are a set of players who have decided no longer to represent their national sides and prefer to be regulars at the IPL. This is evident for the West Indian players which has actually meant that the national team has become quite irrelevant. Even among other countries like New Zealand or England there have been cases of players choosing at times to go commercial. Therefore IPL has changed the way in which players choose their loyalties. This may not be good for conventional cricket.

The second is the spread of vice, which is unfortunate. Two areas come to attention here. The first one relates to gaming. There are several such online games which let the people bet on favourite teams based on a set of rules. One chooses a set of players and the one who scores the maximum points on the basis of actual performance of the players in the concerned game, draws the prize. One may argue that such speculation is analogous to stock market trading where one buys shares based on the name of the company and may not understand the fundamentals. But the number of people who have been drawn to these platforms is enormous and it may be in order for there to be some regulation. For stock markets there is SEBI which provides the ground rules.

The other related concern is that once there are bets of this sort in any sport in the form of gaming, it opens the door to ‘gaming’ from the point of view of participants. Match fixing is something which can become a corollary once the stakes increase substantially. There are hence two issues. The first is that the government has to see to it that such online gaming is checked as prima facie this appears to be as alluring as a lottery ticket. The second is for the BCCI to be aware that once betting is allowed online, it can at some time backfire on the result outcomes of games.

Another vice which seems to be dominating the media is the surrogate advertising which has six of the biggest Bollywood stars endorsing a brand which supposedly sells mouth fresheners but could be propping up sales of tobacco products. One gets to see the advertisement virtually after ever over is bowled. Given that the amount paid by these companies to the Bollywood stars will be very high for a very low value product, the turnover of the main product must justify this cost. The surrogate route is quite obvious.

No government has so far managed to stop surrogate advertising which speaks for the main product covertly. But given the large-scale awareness being spread by the government on the ill effects of being addicted to tobacco, it seems to be a futile exercise as the influencers have no compunctions in being brands for these products. The government needs to seriously consider these issues.

Not easy to raise green deposits: Business Line 21st April 2023

 

Borrowers, lenders require conflicting sops, the former low rates and the latter high rates. An option is to set aside a part of the deposits for green uses

The RBI has announced a framework on the issuance of green deposits to be offered by banks. From a regulatory standpoint the main issue is on the use of such funds, as this requires proper targeting and monitoring. The guidelines are quite exhaustive and ensure that funds raised by banks in the form of green deposits are used for the desired purpose.

In fact, there will be third party verification reports as well as impact assessments to ensure proper use of funds. The challenges really now are on raising such deposits.

Simply put, banks can offer ‘green’ deposits that can be used for lending to sectors which qualify in the list put out by the RBI. Till such time the RBI draws up a taxonomy in this regard, banks will have to go by an illustrative list of industries, prepared by the RBI, which qualify for lending.

A template

We have had green bonds issued by both banks and the government in the past which are supposed to work in a similar manner and the RBI guidelines presumably will form the template for the government too when it comes to deployment. But should an individual put money in a green deposit?

The question is relevant because of the issue of pricing. When it comes to the return on a green deposit, from the theoretical standpoint, the interest rate should be lower than that on a regular deposit.

This way, when lending such funds, the borrower who helps to green the economy will stand to benefit, which helps the national cause. However, this may not make much sense to the deposit-holder who typically seeks higher returns on savings.

If the deposit-holder is an individual, the rate of interest is most important when choosing the bank for investing funds. There is no reason for the individual who is today struggling to get a high return to compromise on the same.

Even in the case of bulk deposits which are essentially made by corporates, a green deposit that offers a low return will make sense only if there are regulatory set-offs. This set-off can be a case of such funds qualifying for CSR in some manner. Alternatively, if the government gives tax concessions to one and all, then they will be attractive.

However, today the government is in the mode of withdrawing all such tax benefits in the name of establishing a level-playing field for all savings and investments.

Therefore, to think that such a benefit will be given is out of place. Also, given the way in which tax benefits on capital gains have been treated, one will be apprehensive of a withdrawal at a later date even if offered today even in the absence of a sunset clause. Hence, the tax angle does not appear to be feasible.

It may be recollected that the government’s green bonds were placed at a yield which was just around 4 basis points (bps) lower than the regular 10-year bond as the market was not willing to pay a higher price or accept a lower yield.

Cut-off yield

The government had expected a much lower cut-off yield. A reason could be that this was the first experiment and the market was not quite ready on how to react to such bonds Therefore, at the institutional level if the green bonds were not very alluring, there is less reason to expect them to click with the retail deposit-holder who is seeking the highest return.

If tax benefits are not possible, then banks have to offer higher rates to garner funds. But it has been seen that every time a bank offers a higher rate on a specific maturity, deposit holders are almost automatically attracted to these buckets.

There can then be a case of most of the incremental deposits flowing to the green deposits that offer higher returns.

In such a case banks have to probably think of capping such deposits, else there will be large scale migration to this area where deployment is still practically a grey area. If done, this will probably be the first time that banks will have to impose a limit on deposits to be accepted. But offering higher rates and getting a good flow of deposits will run the risk of there not being enough deployment avenues due to lower demand.

Going deeper, a question that can be posed is whether we need to have a separate category of green deposits. If banks were very keen to lend for green purposes, they could just set aside a certain proportion of their outstanding deposits as of the previous year as those which will be directed to green projects.

This would be a better way to earmark funds for deployment in green projects. The only problem here would be that the banks will have to take a cut in spread which can be a deterrent.

Again to make this scheme feasible, the government may have to step in to provide some kind of interest rate subvention on green projects. Or such lending can be made part of priority sector loans. Is the government willing to do so?

There are hence a plethora of issues that need to be addressed in the course of developing a green market for both deposits and loans. The major issue is pricing.

When it comes to ESG funding, investors who care about the environment do not mind lower returns if the business saves the planet, but when it comes to the micro level, interest can be limited in the absence of incentives being offered. It could hence become expedient for the government to seriously consider giving some sops to make them attractive.

Market forces at play

Sovereign green bonds still find investors as it is a captive market. However for green deposits, it will be pure market forces at work, which will test the pricing mechanism relentlessly.

All new ideas surely begin with scepticism, and with time such apprehensions would be allayed. The step is hence progressive but will have to be fine-tuned to market requirements to become scalable.

But then, as the adage goes, any new venture which is well begun is half done and one can be sanguine of the prospects.

Monetary policy: The language used could act like a tool in itself : MInt 17th April 2023

 

Just before the monetary policy was announced on the 6th of April, it was assumed that there would be a rate hike for sure. The rationale pursued in most arguments went this way. The uncertainty of the monsoon was a threat to any inflation projection. The government borrowing programme as also the redemption of TLTROs would put pressure on liquidity. The bond yields at the lower maturity end spiked as liquidity tended to be tight. Global uncertainty increased as the bank failures in the USA cast a shadow. The cut in output by OPEC spooked up oil prices. The Fed had already indicated that the rate cycle was not yet over and there would be more to come. Core inflation was sticky and unlikely to come down. More importantly the market indicator, OIS (overnight index swap) pointed to 6.75%. Then came the policy.

The RBI surprised the market with a ‘no change’ in both repo rate and stance. This should not have altered the sentiment significantly. But the difference was made with the language that went with the commentary which when read along with the interaction with the media turned things around. Bond yields have come down significantly even though none of the other factors mentioned have changed. So what all has the RBI actually said?

First in the list is the reiteration of the fact that the RBI action so far is not 250 bps but 290 bps. This is the first time that the reference has been made to 40 bps hike which is the SDF (standing deposit facility) rate that came higher than the reverse repo which is now fixed at 3.35%. This was a very innovative signal passed on to the market. Like the bard had said a rose by any other name would smell as sweet, so does the reverse repo having a new version called SDF. It is the same window that allows banks to put in surplus funds with the RBI at 25 bps more than the repo rate.

Second, there has always been talk on transmission that is linked to the deposit or lending rates which are less flexible given the institutional factors. But the commentary spoke of how the repo rate hike was transmitted to the call money market where yields have gone up from 3.32% to 6.52% over the year. The call money rate normally would always have the repo rate as a ceiling as no one borrows normally at a rate higher than the policy rate when the window is open. But this announcement had the impact of conveying satisfaction on the transmission part.

Third, the statement explained what accommodation was. This has been an enigma given that liquidity was normally associated with accommodation which was getting tight at that point of time. An example was provided to explain this. The repo rate of 6.5% was last associated with inflation of 2.0% in 2019 while today is going with inflation of 6.4% or its whereabouts. This means that there is already a lot of accommodation that needs to be withdrawn. Therefore the stance becomes clear now.

Fourth, the RBI has also clarified that monetary policy was driven mainly by domestic factors when the question of the Fed action came up. This was different from the September policy where the statement made a strong reference to the Fed action as being one of the shocks that was pervading the world which could not be ignored. This cleared the air to the market that the Fed action on rates would matter. Hence even though the Fed would be raising rates, this would not ricochet to our perimeter.

Fifth, the inflation forecast was lowered very marginally from 5.3% to 5.2%. This again sounded the bell that all was under control and things like oil or monsoon, though risks to the inflation numbers, need not be considered seriously today.

Last, in the course of the meeting with the media, the concept of real interest rates also came up. With the RBI’s projection of 5.2% inflation in the fourth quarter of FY24, the current repo rate would yield a real return of 1.3%. In February the forecast for the fourth quarter was 5.6% which gave a real repo rate of 0.9%. Now it has gone up to past 1%.

Putting all these factors together the language conveys the feeling that this rate hike cycle has ended. This is a powerful message sent which also shows satisfaction at the impact of the hikes invoked so far. The response was a sudden decline in bond yields in the market even though nothing has changed. In fact even the stock market has taken heart at this messaging and responded in an affirmative manner.

This really show that language is very powerful when it comes to monetary policy. While announcing a ‘no-change’ in policy rates, the RBI has maintained that the decision holds for the present meeting only. This keeps open the doors to invoke hikes in future if warranted. From a central bank standpoint, the messaging has been quite direct of being ‘watchful’. This is what economists mean when they say that often ‘language’ is more powerful than policy action. This is more so because often policy action is anticipated and tends to be less potent as it becomes predictable. But speaking straight has the

advantage of leaving it to the market to interpret even though the official position is that everything holds only until the next policy in June. But, markets are not rational and have their own way of interpreting the prose.

Though trending downwards, inflation remains a concern: Free Press Journal 15th April 2023

 

We must remember that inflation at 5% still means that prices are going up and hence often it is a misconception to interpret falling inflation as falling prices

The RBI had decided not to increase the repo rate in its policy announced on the 6th as it was confident that inflation was under control. The latest data for March shows that inflation has come at less than 6% at 5.7% which supports the decision.

In fact, the inflation numbers are going to trend downwards because of the base effect. In economics the term base effect is used to explain low or high growth number based on the last year’s number being biased. In this case, inflation numbers have been very high in April-June 2022 at above 7% in each of these months. This means that the inflation numbers for the coming months will be moving down which is in line with the RBI’s projections on inflation being 5.1% for the first quarter. Does this give satisfaction?

First we must remember that inflation at 5% still means that prices are going up and hence often it is a misconception to interpret falling inflation as falling prices. Prices are still going up, albeit at a lower rate is the meaning of inflation coming down to 5.7% in February from 6.4% in January. In fact for the year, inflation has averaged 6.7% on top of 5.5% in FY22. If one adds FY21 when it was 6.2%, it cumulatively means households are worse off by 18.4% in 3 years after covid started. This is serious especially when one compares the return on savings in the rudimentary bank deposit.

Second, inflation remains a concern in two areas in the food basket. These are cereals and milk. Last year there was a decline in wheat output due to adverse climatic conditions which have been replicated this year too. The government maintains that wheat production will not be affected while market sources say otherwise. Ultimately it will have to be seen if there is any supply deficiency as this can translate to higher prices once again. Last year the government was also not able to procure adequately through the Food Corporation of India as farmers chose to sell outside at higher prices.

Milk prices have been rising gradually every year and this time there have been three hikes which has caused high inflation of around 7.5% for the year. The price of milk unlike wheat never comes down even when shocks settle down. This was a case of fodder prices going up along with other inputs. Therefore higher prices are here to stay.

Third, there are two sources of concern when it comes to inflation – oil and monsoon. Crude oil prices apparently have not been affecting us. But this is due to the new pricing dynamics. The retail price of petrol in Mumbai is say Rs 106/litre and has been at this level for almost 10 months. This was during times when the crude oil price crossed $ 120/barrel as well as when it came to less than $ 80/barrel. This meant that there was protection when prices went up, but there was no relief when the price came down. The reason is simple. The burden is shared between the OMC and consumer most of the time as the government has not been willing to share the cost. (It has done so twice in the last 3 years when excise was lowered, but states have not followed suit).

Crude oil price risk remains as one is not sure as to how high it can go. Typically a price under $ 100/barrel may not lead to any change in retail price as this is a pre-elections year. Anything higher can invoke a price increase. Therefore this needs to be tracked closely. However, the government has been increasing the price of LPG quite frequently which is adding to inflationary pressures. Therefore, crude oil continues to be a stress point.

The other area of concern is the monsoon. There are conflicting reports on expectations of the monsoon. The IMD expects 96% of long term average which is normal while Skymet, a private agency, expects a shortfall with the level being 94% of average. This year it is expected that there will be an El Niño event which typically means sub-optimal monsoon. Past experience has been sketchy but in this situation would be critical as India’s growth story is premised on a good harvest leading to steady rural income and demand. The inflation potential too resides here.

Last, what is called core inflation, which is non-food and non-oil inflation has been sticky at around 6%. This is linked to products produced by companies which can be goods or services (health, education, recreation). All companies have been through a phase of rising input costs in the last 2 years but have only recently since September 2022 started passing them on through higher prices. This process is still on and indications are that this may have ended in March with some residual spillover in the first quarter of next year. This being the case, there is some potential inflation around the corner.

Hence, while the inflation situation at the institutional level appears to be under control, there are latent threats on both food and oil sides besides the cost-push forces. The RBI forecasts of 5.2% for the year look reasonable though there can be some upward risk. This also means that the basic target of 4% will not be achieved anytime soon.

Also from the point of view of the consumer, even another 5% over 18% in the last 3 years would mean cumulatively close to 25% in 4 years. This is at a time when incomes may not be rising at the same rate across the board. And for retired people who depend on deposits and other fixed income sources, this would be additional strain.

Leading the leader: How top people in a company need to be carefully selected and coached for the job: Financial Express, 9th April 2023

 Unfiltered: The CEO and the Coach is a must read for all CEOs and directors on the boards of companies. Written by Ana Lueneburger and Saurabh Mukherjea, this book, as the title suggests, touches a delicate spot that few in the corporate world are willing to recognise and accept. Can we ever do things wrong? Can we deal with people in a different way? Can we remain focused on our personal lives as well as our jobs? Can we accept that people are different and that we cannot impose our standards on those we work with? Is my team comfortable working with me? Is my team putting up with my behaviour only because I am their CEO? There comes a time when we should all stop and ask ourselves these questions.

The authors represent the CEO and the coach and it is a very bold book because Saurabh is willing to accept that he needs coaching and is comfortable putting down on paper his vulnerabilities that could be addressed through professional interactions. Moreover, the world would get to know the real Saurabh.

Ana is the coach and uses several techniques of psychoanalysis to know the real Saurabh. Would Saurabh have been willing to have a coach? Probably not. In a way he was forced to do so because he admits that his board was not willing to give him a bigger role of being the top man for the group even though he was for the investment bank. This is when he was told to be coached.

When one reaches the highest level in the company at a young age, there are certain common traits that can be observed. Call it the exuberance of youth or lower level of maturity, but leaders have something in common. They are very demanding and push themselves to the limit. That’s not bad enough as it is a personal choice. But they expect the same from everyone else and blow their fuse if things do not go their way. This is where the empathy levels are low as they cannot understand people. They assume that if they are putting in 200%, everyone better do the same. Or else they can leave the company. This is a common situation in companies.

What is really remarkable about this book is that Saurabh is willing to accept his shortcomings and make the changes. One can say that if Saurabh can do it, so should others, because it will make a difference not just to their lives, but also those of the people who work with them. The coach speaks in one chapter and the CEO does so in the following one. They talk about how each one felt about the project that was taken on. They had mainly virtual meetings, and had few personal interactions as they were located in two different countries. When they meet with their spouses in Mumbai they do not talk about the project but this helps in bonding. Now Saurabh uses the technique of bonding with his employees through offsites, games, etc, as it makes a big difference.

Ana takes us through the process of coaching, which involves hearing out the stakeholders and also participating as an outsider in meetings with team members, which helps to form a view on the style of working. Saurabh gives his part of the story and how he benefited from the reactive and proactive coaching he received. We also get to know something about his personal life; and with quotes of Dire Straits, Bob Dylan and Simon and Garfunkel thrown in, one can know his taste in music.

Often we justify our mistakes saying ‘we are human’. But we need to go beyond in building teams. There are also some lessons thrown in that can be more from a standard textbook but are necessary to remember. These are rudimentary thoughts, such as taking care of your health, investing emotionally in professional relationships, ensuring we have circuit breakers to check our emotions, giving people time and space, and so on. All these are important rules to follow, though they may be hard to implement all the time. We need to ask ourselves basic questions like—what do we believe in and what is it we really enjoy?

The message we get from this book is that we need to be very selective when choosing the people at the top. We need to have psychometric tests to evaluate them because business is not about just growing the bottom line. The leaders need to take their people along. A bad tempered boss who causes his top management to leave is not desirable in any company, because the enterprise suffers. Based on these tests, coaching has to be recommended, if not enforced, so that the emotional quotient of these leaders improves and there is more harmony in the organisation.

This book needs to be read by all board members who need to take a call on whether their CEOs need coaching. One should not be surprised if the 80-20 rule will apply.

Unfiltered: The CEO and the Coach

Ana Lueneburger & Saurabh Mukherjea

Penguin Random House

Pp 304, Rs 499

Level Headed Taxation: 7th April, Economic times