The Indian Second Wave

Most obituaries will describe the just-deceased VG Siddhartha as a businessman, a “coffee tycoon” and as the son-in-law of a prominent politician. However, the way I see it, he was no less than a cultural icon, and with one business, dramatically changed Indian culture in two ways.

In 1996, Siddhartha started India’s first cyber cafe, which was one of the few cyber cafes that was actually a cafe. A coffee wholesale exporter, he got into the retail business with the first outlet of Cafe Coffee Day (CCD) on Bangalore’s busy Brigade Road. For fees, you could sit there to browse the internet while sipping on espresso and cappuccino, drinks hitherto unknown to Bangalore’s (already established) coffee culture.

Soon enough he was to exit the cyber side of the business, as his retail chain’s expansion focussed on coffee, and dedicated “cyber cafes” (they were still called that) that enabled people to browse the internet for a fee mushroomed across the country. Nevertheless, we should give him credit for giving birth to an idea that enabled the first generation of Indians to truly access the internet before broadband became a thing.

The first time I interacted with his business was in 1998, when I visited the aforementioned Brigade Road CCD. For a conservative 15-year-old from South Bangalore, it was a bit of a sticker shock, with espresso priced at Rs. 10 and cappuccino at Rs. 20. There were iced drinks on the menu as well, but they were more expensive.

I don’t think I quite liked the espresso (we all ordered that that day, given the prices), but it was a new experience of consuming coffee. As I grew up and came into more money I would patronise CCD much more often.

There was an outlet on the IIMB campus, and that became the default location for any campus “treats”. I clearly remember the cold drinks – tropical iceberg and cold sparkle – being priced at Rs. 32 back in 2004. Prices went up over time but these drinks remain my favourite cold drinks at CCD to this day.

Over the last 10 years, CCD has mostly served as a meeting room for me. When I moved into my current house 5 years ago, I used a CCD that was 300 metres away to entertain any visitors (this outlet closed recently, but a flyer in today’s newspaper informs me that an “experience centre” is coming up closer by).

Whenever I have had to meet someone and we’ve had to find a place to meet, by default we have looked for CCD outlets. And we continue to do so – while Starbucks and the artisanal “Aussie-style” coffee shops (such as Third Wave or Blue Tokai) might be preferable, CCD’s sheer density has meant that it is India’s default meeting room.

Sometimes we under-appreciate the impact that CCD has had in Indian culture. It was perhaps the first large chain of “neutral venues”, where people could meet and hang out for a long time without being pestered by the waiters. I mentioned that I have been using the chain as a meeting room for a few years now. While that might be its primary use, you also find college kids who have saved up a bit on their pocket money hanging out there. My first date with my wife also took place partly at a CCD.

And then there are the loos. CCD has also completely altered the face of highways in India by offering clean loos at its outlets, making it far easier for women to travel.

The chain may not be doing that well – it seems like its financial troubles led to Siddhartha killing himself. However, given that it is a publicly traded company, we can trust the market to resolve its issues so that it continues.

And even if it fails and has to shut shop in due course, what CCD has done is to show that there is a viable market in India for a coffee shop that sells decent (but not great) coffee, where people can sit around and linger and do their business, whatever that may be.

In that way, Siddhartha’s legacy will endure.

 

Government and markets

It’s been a while since I wrote a post like this one – I remember a decade ago, I used to flood my blog with such stuff.

In any case, last week, in response to the “10yearchallenge” meme, Nitin Pai of Takshashila wrote an Op-Ed in the Print on how India has changed in 10 years. While he admits that the country has grown and the lives of people has improved in some ways, the article leads with the headline that India should be be ashamed of what has happened in the last 10 years. This paragraph is possibly representative of the article:

While individual Indians seem to have done well over the past decade, India is more or less where it was. Worse, politics and policy priorities seem to have regressed to 1989.

Reading through the article (I encourage you to read it, it’s good – never mind the headline), I found a clear and distinct pattern in the kind of things where things have gotten better in India and where things have gotten worse.

Everything where markets function, or where the government doesn’t have much of a role, things have changed significantly for the better. Everything where the government has an outsized role, either because it is the government’s job or the sector is overregulated, things have gotten worse. So our cities have gotten more crowded. Infrastructure has gotten worse. Law and order has regressed. And this has had little to do with the party in power – whatever the government touched has regressed.

Looking at it in another way, Indians seem to be highly capable of making their lives better by coordinating using the invisible hand of the market. However, we seem incapable of making our lives better by coordinating using the government process.

From this perspective, there is one easy way to progress – basically reduce the government. Get rid of the overregulations. Get the government out of things where it shouldn’t be. Give a freer hand to the market.

Unfortunately, ahead of general elections this year, we see most parties taking a highly statist line. This is a real tragedy.

Investing in ETFs

So I put some money in an ETF today. This isn’t the first time I invested in one. A long time back, before my then employer had bought and essentially killed Benchmark, I had invested in a couple of their ETFs – the Nifty ETF to get invest in the broad Indian market, and GoldBees to hedge against increase in the price of gold as I was planning my wedding.

I had some Rupees lying around in my bank account for a long time, and given that the Indian markets have tanked, I thought this is a good time to get invested. In fact, this isn’t the first time in recent times I’m having such a thought – about a month back I had put in more money into the Indian markets, but had then chosen a low cost index tracking mutual fund (and I’m not tracking how my investment is doing).

Anyway, today I decided to invest in ETFs since the transaction costs (in terms of both trading, and annual expenses) are much lower. A quick chat with a friend currently trading the Indian markets revealed that the SBI Nifty ETF is the best option to go with, and I was left with the small matter of just making the investment.

I’m generally happy with ICICI Direct as my broker, since in general the interface and app are pretty nice. Last month, the purchase of the mutual fund through the same app had been pretty simple. And I imagined buying the ETF will be easy as well. It wasn’t. And if I, as a professional investor with considerable capital markets experience, find it hard to invest in ETFs, I can only imagine how hard it might be for mango people to invest in them.

So the points of pain, in order, that prevent people from investing in ETFs:

  1. Knowing that indexing exists. Most people seem to think that the only ways to invest are by researching the stocks themselves, or by paying an asset manager fairly hefty fees.
  2. Once you know you can index, the fact that you can do it through an ETF. ETFs are again not well known, and not really marketed broadly since their fees are low (with Benchmark’s demise, we don’t really have ETF-first fund houses in India, like we have Vanguard in the US).
    1. Related, even some of the more popular robo advisory funds in India largely use mutual funds, rather than ETFs.
  3. Once you know you can index, and do so through an ETF, the next task is to find out which ETF you should invest in. Literature exists, but is not easy to find. My friend sent me this page, and asked me to select the fund with highest market size. Knowing that I want to invest in the broad market, and in large caps, the choice of SBI Nifty ETF was easy for me.
    1. But it’s not so intuitive for a less sophisticated investor. For example, correlating asset size with liquidity isn’t exactly intuitive.
    2. Different ETFs track different indices, and knowing which one to invest in is again not a trivial task.
  4. Having selected an ETF to invest in, you go to your broker’s site or app (I used the app). And you need to know that ETFs are clubbed with equities, and not with mutual funds (not an intuitive classification for most people)
  5. So I go to ICICI Direct’s Equities page, allocate funds to it (from my bank account, also with ICICI), and hit “buy”. There’s a text box where I need to enter what I’m looking for, and then there’s a dropdown that pops up.

    I type “SBI”, and the first thing it shows is the SBI Bank Nifty tracker. This is followed by lots of bonds. I don’t know if it’s clever nudging on ICICI’s part to get you to invest in the Bank Nifty, since that has a significant exposure to ICICI, or if it’s something as mundane as alphabetical sorting. The latter is more likely.

  6. Scrolling down the list past all the bonds, it’s not easy to know which is the SBI Nifty ETF. Because there’s a “SBI Nifty Next 50 ETF” (smaller caps, so more volatile, not something I want), and a few others with confusing names.
  7. Then you need to enter the number of units you need to purchase. This is unlike in mutual funds where you just enter the amount you want to invest. Here I had to pull up a calculator to know exactly how many units I had to buy.
  8. I hit “market order”, and then on the next screen I got a warning that since this wasn’t a particularly liquid instrument I was only allowed to post limit orders. So I had to guess what was a reasonable spread I was willing to pay, and put that. Thankfully the ETF was fairly liquid, and I got execution close to mid.

Honestly, I felt rather daunted at the end of the exercise, and I’m what most people would classify as a sophisticated investor. So there is no wonder that more people aren’t investing in ETFs.

The advantage of ETFs is extremely low fees (the fund I purchased today charges 7 basis points a year), and one downside of it is that it doesn’t allow for more marketing budget.

I’m beginning to think that the way to “solve” this market is by having a bundled ETF and robo advisory offering. Perhaps more on that later.

 

 

The advantage of recurring payments

One of the best things about payments in the UK is the ubiquity of the direct debit system. From gym memberships to contact lenses to television licenses, all sorts of subscriptions are sold on a direct debit based model.

The mechanism is simple – the merchant, with the consent of the customer, sets up a direct debit system with the customer’s account such that a specified amount is debited periodically. This direct debit system can be cancelled at the customer’s discretion, resulting in automatic annulment of the subscription.

This is a great business model because it allows businesses to acquire customers for a repeated transaction, without the latter having to commit for too long a period.

The key feature of the direct debit system is the customer opt out. That the account will be continued by default means that it takes explicit action by the user to terminate the subscription, which helps the business acquire customers with the cost amortised over several time periods. The any time opt-out feature (which the user can do at her bank’s website or app, without consent of the merchant) means that the commitment at any time for the customer is for one period only, making the product an easier sell.

In the absence of the recurring payment based model, the business will either have to offer short term “subscriptions”, which implies a customer acquisition cost at each period, or long term contracts, which takes a higher upfront commitment from the customer making it a much harder sell.

In that sense, a recurring payment model offers a nice middle ground, resulting in value being unlocked for both the business and the customer, resulting in enhanced welfare all around.

In that sense, the lack of a recurring payments system is a key shortcoming of the payments scene in India. While it was possible to do this earlier, current rules by the Reserve Bank of India require authorisation by the customer (in the form of two factor authentication) for every transaction, making them opt-in rather than opt-out (the opt-out feature is key to amortise customer acquisition cost).

The updated version of the unified payments interface (UPI 2.0) was supposed to offer this recurring feature, but media reports say that the update is being rolled out without this feature. That is surely an opportunity missed for India’s businesses to grow.

Poor food

Until about 1970, when the so-called Green Revolution happened, India as a country collectively didn’t have enough food (remember PL-480 and “ship to mouth existence”?). Until liberalisation in the 1990s, even people who could possibly afford it couldn’t get the food they wanted (remember lining up at ration shops?).

In other words, Indians (as a country – there are still lots of people who don’t get to decide on what to eat since they’re way too poor) have had a proper choice in terms of what to eat for just about one generation now. More than half the Indians who are currently alive spent at least some part of their lives at a time when it just wasn’t possible at all to eat what one wanted.

What this implies is that what we consider to be “traditional food” is largely “poor food” – we and our ancestors ate that not because it was what was the most nutritious, but because that is what was available, and what we could afford.

And so you have most of our traditional food being extremely heavy in carbs and light on almost everything else. I have friends who comment that most Indian vegetarian food hardly has vegetables – consider the sambar, for instance, which just has a few pieces of vegetables floating around. It is a correct comment, but that is because most of what we know as traditional Indian food evolved through times of shortages and poverty.

There are times when I attempt to give people nutrition advice, and while people listen to me politely, they end up saying something to the effect that if they start eating “traditional food”, all will be fine with their health again.

We’ve evolved to fundamentally trust the familiar, and distrust the new. And so it is with our food choices. Without really understanding why we and our ancestors ate the food that we ate, we consider “traditional food” to be good.

Now that I can afford it, I try to make sure I have balanced meals, and a lot of “traditional indian foods” that I grew up eating hardly get consumed in my house now. Consider the uppit – which is mostly carbs (semolina) with a small handful of vegetables and some fats thrown in – incredibly unbalanced stuff. Or beaten rice (avlakki/poha) – which is so light that you start feeling hungry within a couple of hours of eating. And so on – once you start looking at at the nutritional value of what you are eating, you will find yourself thoroughly dissatisfied with a lot of “traditional stuff”.

So my advice to you is this – if you can afford it, give what you are eating a thought, and make sure you get the right kind of nutrition without giving too much concern to your “priors”. And if you’re on a tight budget, optimise that to make sure it goes as far as possible in providing you a balanced diet.

Censor Board as a preserver of the Bollywood cartel

The Indian Censor Board (Central board for film certification or something, to take its full name) has come under flak for the last year or so, for imposing excess cuts on movies, and more recently for some hilarious videos that its chairperson has made and uploaded (in the interest of taste I’ll not link to the video here).

The latest instalment is its decision to make over 45 edits to Quentin Tarantino’s latest movie “The Hateful Eight”. The common reaction on Twitter has been that it’s useless to watch a Tarantino movie with so many cuts in the theatre, and it’s better to illegally download and watch the movie. Here is the document listing the cuts:

While the popular narrative remains that the Censor Board has been acting the way it has been because we have a “right wing conservative” Union Government, it doesn’t stand that test that the Censor Board has become especially kooky after the current government came to power (barring the hilarious videos and comments that is). The fact of the matter is that the Censor Board has been kooky with its edits much before the current government came to power.

There is a simpler explanation to why the Censor Board censors as much as it does – it seeks to protect the interests of the “Bollywood cartel”. By Bollywood, I refer to the mainstream Hindi cinema industry based in Mumbai which churns out “family movies” which don’t contain too much sex or violence, all of which seek a “U” (universal) certificate from the board.

The idea is this – Bollywood mostly makes “mainstream” movies, without much scope for the censor board to cut anything, so they’re largely insulated. Foreign language (including English) and offbeat movies, however, are more experimental, and are likely to have much more sex and violence.

Cutting parts of a movie and muting further portions (refer to above document) drastically diminishes the experience of watching the movie. Scenes cut in a non-intuitive fashion, and you are forever guessing what word was muted out.

Given such an inferior experience of watching, the value you gain from watching drops, and you might decide it is not worth watching at all. Those that have the means might instead choose to download the movie via illegal torrents, or watch it online using VPNs (effectively watching another country’s “edition”).

To summarise, competitors of mainstream Bollywood movies suffer due to censorship, by declining viewership, and viewership that moves to illegal media. Bollywood, on the other hand, by not having much that can be censored, is not similarly affected, and is thus relatively better off!

The union government has instituted a panel to review the activities of the Censor Board. The panel is headed by Shyam Benegal, who is an “alternative filmmaker” who doesn’t belong to the Bollywood clique. Hopefully some good will come out of that!

To app or not to app

The difference between using an app and a website is in terms of the costs. The app reduces the per-transaction cost, thanks to customisations and additional user information it possesses. There is a fixed cost in using the app, though, in terms of time, memory and bandwidth incurred in installing it, and user data that the app collects.

The costs of using an app versus using a website, as a function of the number of transactions, is illustrated in the figure here (this is simplified but not far from the truth):

app webThis is the graph you need to keep in mind when you are trying to take your product app-only or web-only. Labels from the graph have been removed on purpose.

For low levels of usage, there is no point in installing an app (unless the reduction in marginal cost is dramatic), for the fixed cost is not going to justify the benefit that the app offers. When the usage is high, it makes sense for the user to install the app, since the fixed cost will amortise over the larger number of transactions.

When a service goes app-only (as is the fashion in India nowadays), it loses the long tail of low volume users who see no value in incurring the fixed cost of keeping the app. On the other hand, a web-only service is likely to lose power users since they have to incur the higher marginal cost each time.

So if you are starting a new service and are wondering whether to launch the service on app first or web first, think of the frequency with which your customers will be using the service, and the incremental value you can add if they use the app (be realistic about these estimates). If it is either a high-frequency service (like email or news, for example) or a service where the value added through the app is massive (like Uber, which can read the user’s location), you better lead with an app.

On the other hand, if the service is low-frequency and the quality of experience in app and web need not be dramatically different, it makes sense to lead with the web offering and add an app later only to hold on to your power users.

From this perspective, I’m not convinced of the logic of Indian companies such as Flipkart and Myntra (which are shopping sites, which most users don’t use that often) to go app only. India being a ‘mobile-first’ nation is at best an excuse.

Postscript

The above graph also explains why businesses offer attractive incentives to customers to install the app – to mitigate the high fixed cost of installation. The problem is that the fixed cost is borne not just during installation but also over time (app occupying phone space, snooping on you and sending you notifications), so smart users take advantage of these incentives and uninstall the apps after immediate use.

 

 

India as a Triangle Power

In the course of a “thinktanki” discussion at the Takshashila office on Monday, I came up with the concept of the “triangle power”. As it might be intuitive to guess, the concept stems from Indian cinema, which has championed the cause of the “love triangle” plot formula.

The trigger for this post is this post by Takshashila scholar Kabir Taneja on India’s management of relationships with Africa, and specifically about India’s investments in Sudan. They key line in Taneja’s piece is this:

Even after the carving out of South Sudan from Sudan, New Delhi has managed to keep close relations with both Juba and Khartoum, even though the near war conditions between the two states do keep India’s Foreign Ministry on its toes.

Sudan and South Sudan don’t particularly see eye to eye with each other, since the latter broke away from the former following a protracted struggle. Yet, India maintains good relations with both of them. This has its own troubles, as Taneja’s piece mentions – South Sudan is seeking India’s help to bypass Sudan, but India is not too willing since that might anger Sudan. Despite these irritants, being a triangle power there puts India in a unique position.

India, in fact, has had a rich history of being a triangle power. The most prominent example is its continued maintenance of excellent relations with most countries in West Asia, which have had a strong history of mutual bickering. If we look at the current geopolitical theatre in Central and West Asia, India has great diplomatic and economic relationships with Iran, Iraq, Saudi Arabia, Israel, UAE, USA and Russia, to name a few. In other words, India helps complete many a triangle, with not too many other countries being in this position.

Yet, historically India has hesitated to use its position as a triangle power to further its national interest. For example, India was excellently placed to broker talks between the USA and Iran a few years ago, but that opportunity was passed on, and USA and Iran made up elsewhere (in Switzerland). India could also potentially help broker some inter-state conflicts in the gulf region, yet isn’t doing much on that front.

The great thing about India is that it has slowly and steadily built up a reputation of a triangle power in several theatres, but much needs to be done in order to utilise this to further national interest.

Expanding IMPS

I hate carrying and transacting with cash. I find it extremely inconvenient and ineffective. The only place where I’m happy carrying and transacting with cash is Spain, where there is a high rate of pickpocketing, and carrying cash puts a floor on your downside.

There are several reasons to this. Cash is messy and dirty. Cash is prone to mutilation. Change is a massive problem. Even from the point of view of the central bank, printing currency costs significant money. When splitting bills at dinners I’m usually the guy who uses his card and “friendTMs”.

Recently (much belatedly, as I figured), I discovered IMPS. This service by the National Payments Corporation of India allows you to transfer money realtime. I used it once to transfer money between two bank accounts held (at different banks) by me. The “funds received” SMS arrived before the “funds transferred” SMS. It’s actually real time.

I had to make a payment to someone else last week and I had a problem with my ATM Card. Using the Citibank Mobile App, I discovered I could pay him up to Rs. 1000 without a second factor authentication, and only knowing his account number and bank IFSC code. The transaction took less than a minute. If he has a “MMID”, I could do the transfer using that ID and his mobile number, without him giving me his bank details. Again instantaneously.

So I’ve started wondering what prevents the tender coconut guy down the road (with whom I have a perennial change problem since a coconut costs Rs. 25, and 5 rupee notes/coins are hard to come by) putting up a board with his mobile number and MMID so that I can pay him through IMPS. I wonder the same about other vendors that I encounter in daily life.

The problem is one of product management and pricing. One reason credit cards haven’t taken off as much in India is that many vendors are concerned about the (~2%) interchange fees they pay on every transaction. So far I haven’t been charged for IMPS (at either end). Popularising and marketing it needs funding, though, and some kind of transaction fee structure needs to be figured out.

Currently, you have apps like Pockets, PingPay or Chillr that allow IMPS transfers. The beauty of these apps is that they eliminate the need for sharing MMID (which recipients have shared with the app on registration), and money can be transferred using the recipient’s Mobile Number only. The problem, though (as I had mentioned in this LinkedIn piece), is that these apps are currently building walls around banks, not permitting interoperability.

Since transactions take place on IMPS, there is no technical constraint. It’s about the war between these apps which prevents inter-bank integration. Given the network effects, though, it makes eminent sense for these platforms to merge and consolidate (or for one to “beat” the other), since this will unleash the “2ab term”.

Having watched the payments sector in a while now, I’m fairly bullish that electronic and mobile payments will take off in a rather large way here. What I’m not so clear about is what kind of pricing model will emerge, who will pay for it, and who will ultimately make money from it.

One Rank One Pension – some thoughts

There has been a lot of debate of late on whether veterans should be moved to a “one rank one pension” system. I won’t bother explaining the whole deal here, I’ll let you read this brilliant post by Ajay Shah about the numbers behind the move. Now that the quant has been outsourced, I can put forth my “qualitative” arguments.

I’m not a fan of this One Rank One Pension (OROP) move. I’m not against paying our soldiers, or veterans, well – I think it must definitely pay above market rates for the skills required for the job. Yet, I think OROP is a “one delta” solution to the problem (previous post here about government’s one delta thinking on agriculture), and can lead to massive unfunded liabilities.

The problem with any kind of pension scheme is that you create liabilities today that need to be funded later on. And at a later date these liabilities might become unserviceable. From this perspective, it is important to try and fund any future liabilities today, or at least have a handle on the precise magnitude of liabilities required. OROP, being “inflation indexed” (that’s Ajay Shah’s nice model to look at it), doesn’t allow for proper budgeting and long-term planning.

It is precisely due to this budgeting issue that the government moved most of its incoming employees to the New Pension Scheme (NPS) in 2004. NPS, unlike previous pension schemes, is a “defined contribution” scheme, where your pension is paid out of a corpus you create by your own saving. From an accounting perspective, it moves liabilities from tomorrow (pensions) to today (higher salary to fund the contributions), and is an excellent move. And there is no reason for it not to apply to the armed forces.

Most of the arguments being made in favour of OROP are emotional (“how can you deny our veterans money” etc.), and not well backed up by logical or economic reasoning. One of those is that lower-level military persons retire when they are 35, and hence need a “one rank one pension” (which I absolutely fail to understand). While I understand that the rigours of the role imply early retirement, I don’t see why defined contribution doesn’t solve the problem. It will have to be matched with higher salaries (to fund the contribution required for a long lifetime of retirement), but that implies liabilities are funded today, which is superior to pushing liabilities under the carpet for future  generations.

The thing with NPS is that it cannot be pushed retrospectively, and hence can apply at best to all forthcoming hires. We still need a solution for the existing employees and veterans, who are already on a defined benefit scheme. Yet, the important thing to consider is that the beneficiaries should be divided into three categories – current veterans, current servicemen and future servicemen, and we should find separate solutions for the three.

It might be argued that without defined benefit pensions, it might be hard to attract talent for a high-risk job like the military, and that is why we might need OROP. This is where the “derivative thinking” comes in. The thing about a job in the military is that there is a higher-than-civilian risk of losing life or limb. The solution to that is not blanket higher compensation – it is risk management.

What we need is generous death and disability insurance for our military, and this too should be purchased by the military from a professional Life Insurance firm. A generous insurance package can help mitigate the risks to life borne by military personnel, and should be sufficient to attract necessary talent. The purchase of such policies from professional insurers is important, for you don’t want the military to be doing an actuary’s job. More importantly, such a purchase will push liabilities to today rather than to tomorrow, and the last thing an army will want during the time of war is increased expenses on account of insurance.

The current debate about OROP has opened the door for a complete overhaul of military compensation. The government should jump at this, rather than simply get bullied by veterans’ groups. As Nitin Pai argues in this editorial in the Business Standard, compensation is an economic decision and should be made based on economic (and financial) reasoning, not based on emotion.