The Consumer Is the Queen

A  BCG report finds that women control almost two-thirds of the global consumer spending.  Marketers  must keep  that  in  mind  while  chalking  out  their  strategies as  the  needs of women differ substantially from those of men. Researchers say women behave like foragers and men act like hunters. Even when they shop. While that fundamental truth hasn’t changed what has is the kind of control she exercises over the family purse-strings.  A  recent  study  by the  Boston Consulting  Group  (BCG)  finds  that women  control  almost two-thirds  of  the  global  consumer  spending.  It talks about a revolution that is taking place today unnoticed by most. “It is a revolution of by and for women — driven by a desire for more: For ongoing education, better  ways to  nurture  themselves and  their  families,  increased success  as  executives  and entrepreneurs higher earnings and for better ways to manage and leverage their accumulated wealth” says the study. And from what BCG concludes the average Indian woman is falling in line with her global counterparts.

Women In India

Marketers  must  keep  that  in  mind  while  chalking  out  their  strategies  as  the  needs  of  women  differ substantially from  those of men, avers Abheek Singhi, partner & director, BCG. That is because women today are more conscious of the products they buy and the need of their family members. Singhi says the average Indian housewife, who is middle-class but asp rational, wants the best for her children. She might  shop  at  the  local  grocer,  who  gives  her  credit  and  the  occasional  discount,  and  buy  mostly unbranded products, but she keeps part of  the  budget  aside for the higher quality, expensive products as she is more quality-conscious today. Women in India constantly face the challenge of having too much to do and too little time for it all-they rue the lack of ‘me time’ and that is the result of the cultural DN of most Asian countries where women are largely responsible for the domestic chores and taking care of the children ” says Singhi. The study also draws a ‘happiness curve’ for women which shows how the happiness  levels keep heading down  from  their  teenage  years  and  continues  till  the  time  the  middle  age  is over.  A major cause of dissatisfaction and stress is, of course, the lack of time and too much work.

But why are these results important for marketers? Because, of the $18 trillion global consumption two years back, $12 trillion was controlled by women. That is two-thirds of the total consumption on an average.  While in developed countries the percentage is over 70, in developing countries the figure is slightly less. According to the study, the global women economy is much larger than the total consumer spending in India and China put together. Overall, it is safe to conclude that women have the last word in spending decisions pertaining to most of the product categories. So it makes sense for marketers to keep the ladies happy to stay in the family’s consideration set.

Sob Story

Women are dissatisfied with many product categories, the study reveals. The worst  10  categories are investment,  cars,  banking,  life  insurance,  physicians,  car  insurance,  work  clothes,  hospitals,  personal computers and lodging. There are many mistakes, according to Singhi, that men make while marketing to women.  Ignoring  the  emotional  appeal,  cutting  prices  mindlessly,  overlooking  the  need  for  time-saving  solutions  and dressing  up  every  product in pink  are  some  of  the tactics  that  fail  to  impress. Of course, there  are  brands like  Dove  that  seem  to  truly understand  women  and  are  able  to  establish  a connect with them. The BCG also does a detailed comparison of the needs of women in some Asian countries to point at the similarities and differences. It says while the  challenges faced by women of India,  China and Japan are somewhat  similar,  the  weight-age  each  group  places on  the challenge  areas  tend  to differ by  country. The aspirations seem to match somewhat; financial stability and having free time score everywhere.

Interestingly, Asian  women  appear  more  optimistic  than  their  Western  counterparts,  but  control  a smaller proportion of the household spends (figures). Where women from India, China and Japan differ is the product categories they feel need more customization.  The top priorities for Indian women are lingerie, home- cleaning services and kids’ clothing.  For Chinese women, it is hair products, hair care services and skin care products.  For Japanese women, it is hospitals, car rental and physicians.  Indian women  are  willing  to  trade  up  for  food,  dairy  products  and  household  cleaners. Chinese women can trade  up for  cosmetics  and  personal care  products;  their  Japanese  counterparts for  travel,  home  and organic food. The responses of these women to different product categories can offer clear guidelines for marketers about the products that need to be improved upon. “Women worldwide represent the largest pool of growth ever. There is a vast business opportunity to fill the gap between the time at their disposal and the degree of customization in the products/services they need” adds Yeonhee Kim senior partner & managing director BCG Korea. The statement by Kim sums up the challenge for today’s marketers.

Here one needs to also take count of the expectations of women from different categories of products they buy. Anand Ramanathan, associate director, KPMG Advisory Services says that depends on where she is coming from. He classifies women consumers into two categories-professionals and homemakers. “Homemakers are asp rational efficient and are smart buyers. They have a functional and an emotional connects with a particular brand. They do a survey regarding the attributes, benefits and repercussions of a particular brand before buying” he says adding “the professional woman rely heavily on time-saving products like ready-to-eat food category.” Attracting women is no cakewalk though.

Three factors play an important role, according to Ramanathan:  price, packaging and product positioning-three of the proverbial 4Ps of marketing. “The product should give immediate value; it should seem worthy enough to buy. The packaging is important because women are more aesthetically-oriented than men” he says. Talking about positioning at the point-of-sale Ramanathan says “marketer should be smart enough to place the product according to the needs of a customer. For example ‘Puja’ items and fruits are mostly placed together that makes shopping convenient for a customer.”

That is largely because the way men and women shop is different. “For men shopping is about finishing the process; women want to prolong the experience” says Kishore Chakraborti vice -president, consumer insight and HFD McCann Erickson India. “Her consumption pattern is holistic. What I mean is that a woman thinks about her family at the time of buying and buys not just for herself” observes Chakraborti. Products that  offer many benefits that save on  time, and offer  the maximum value  for  money are the ones  that  succeed  in  attracting  women  shoppers.  Chakraborti feels marketers should continue to innovate and look for new ways to connect with women. He gives the example of Horlicks, which felt it was necessary to launch a variant especially for women.  Apart  from  expanding  the  brand  franchise  it also  helped  by  getting  the  family  more  favorably  disposed  towards  the  brand.  The ads for Women’s Horlicks struck an emotional connect with women because it touched upon the fact that women work really hard and therefore need more nourishment. The other example Chakraborti cites is that of Kellogg’s Special K. “The whole idea here is that women don’t just want to stay fit they want to look good as well. So Kellogg’s Special K offers both nourishment and helps in weight loss. The thing to remember here is that when the mother starts consuming a brand, the entire portfolio can find a place in that household” points out Chakraborti. While many of the study’s findings do not come as a surprise to companies the hard data may help them focus better  on  some of the problems cited  by  women  and help  them step  up and  deliver  more sophisticated products and segmented service.

By Manas Patra,  IBS Bangalore (Class of 2000). Manas is based in Shanghai, China. You can reach out to him at pmanas1@rediffmail.com

Hr : Move to Corner Cabin

CEO’s job is no longer the sole prerogative of people with line function background. Established norms and conventions are changing to pave way for the support functions like HR as they prove their worth and claim the coveted chair.

Success of any organization largely depends upon its people so long as the right ones are hired, developed, motivated and retained. If this HR cycle is ensured, one would face less of problems in terms of legal, labour unrest and attrition etc.  Now the question comes up, is it the job of the HR manager only to put these things in place? Or does it fall in the purview of every manager in general and on the shoulders of the CEO in particular? The needle certainly points towards the head of the organization, a fact which drives home the point that for every manager, human resource management skill is important, may be even vital.  Hence all managers in a sense are HR managers as they go through the above mentioned HR cycle as an operational task on a daily basis.

There is a never ending debate on ‘line and staff’ functions, the authority they exercise, the roles they play etc.  Line managers are generally associated with authority and power to make decisions and they represent departments like sales and production while all other divisions including HR fall under the category of ‘staff or support’ teams. Their job is mostly restricted to playing advisory role across the organization while within their own department they need to carry out line function as well. An HR manager also carries out a co-ordinative function also referred as ‘functional authority’ in terms of keeping the ‘top brass’ in picture about the proper implementation of HR policies and practices in the organization. To that extent there is a need for a perfect harmony and proper understanding between HR and all the other departments more particularly the line divisions. It’s this particular function of both line and HR managers that is resulting in interchange of their roles often as being practiced by some companies. A survey by the Center for Effective Organizations at the University of Southern California revealed that close to one fourth of US companies appointed managers with no HR exposure as their top HR executives citing the reasons that they may give the company’s HR a ‘strategic boost’ and may better integrate it with other business practices of the company. Mohandas Pai of Infosys was the CFO before moving to head HR function of the company. While this is true, some companies find it absolutely essential to make their top executives go through the HR mill before allotting the corner cabin, like Lawrence Jackson of Wal-Mart had to function as Head HR for over a year to occupy its global procurement division head’s chair. Conversely back home in Dr. Reddy’s Lab we had the HR head moving into CFO’s chair once.

The point to bring home is that HR as a function is facing a continuously ever changing business environment and the managements’ expectations are not getting limited to merely HR playing support or advisory roles only. An increased tendency is being noticed to nominate HR personnel to don the line roles and more so that of the coveted CEO too.

Studies by Stanford Research Institute and Carnegie Mellon Foundation among Fortune 500 CEOs reported to have found that 75% long term job success depended upon people skills and only 25% on technical skills. Fortunately HR professionals are better disposed on this aspect and no doubt they are inching their way towards CEO’s table. A practice which started with PSUs like SAIL, NTPC and Power Grid etc slowly crept into the corporate corridors of LG, Aditya Birla, Yahoo India etc. Days are not far off when we would see more and more HR professionals claiming seats at the strategy tables and occupying the corner offices and all that they need to do is to develop their over all business sense. This augurs well for the profession.

The importance of HR needs no further emphasis as amply proved by the experience of Taj Mahal Hotel in Mumbai during 26/11 attack in 2008. Research by Prof Rohit Deshpande of HBS into the HR practices of the organization highlighted the uncommon valor of the young workers who helped the guests escape, by forming a human shield around them, and those who stayed on at their posts to continue helping the guests despite the option to flee and in the process eleven of who have laid down their lives in saving others. A typical case of ‘giving their today for the tomorrow of their guests’ or ‘HR beyond HR’. The uniqueness of the HR practices followed consists of  hiring people for their attitude and character and not for academic skills, training them for empowerment and taking decisions and reward people for their performance on real time basis. The researchers reportedly found similar display of gallantry at Taj properties in Maldives at the time of tsunami in Dec 2004. Performance ‘beyond the call of duty’ appears to have become a second nature with the staff in Taj hotels, where ordinary people do extra ordinary things and where leadership and rising to the occasion apparently is the way of life. In similar lines Virtusa a 2000 head count IT company based in US but mostly operating out of India has a unique concept called ‘Every employee is a HR manager’ which underscores the importance  attached to HR function as such. That is to say,  HR is no longer a support function and in the current corporate scenario, it has already assumed its strategic importance, adopting an operational or a line  posture. To that extent HR has become a ‘measurable’ function like ‘sales’,  and HR managers are getting business oriented while performing their normal HR functions. Yet another aspect is of ‘HR outsourcing’ whereby HR managers are freed from the routine and mundane functions of HR, and they are made available to attend to more important strategic functions in terms of organizational culture, customer orientation, competitors and technological advancements etc.  No doubt the HR outsourcing value world over has climbed to reach a figure of $67 billion by 2011 while it was hovering around $ 42 billion three years ago. The fact that ‘HR outsourcing’ saves HR costs by 30-40% needs no debate.

End of the day, in the present context, it is the HR head who would have made people happy resulting in high productivity, partnered in business success having played a key role in the strategy ultimately making a positive difference to the bottom line in the balance sheet.  Does it take more to become a CEO? May not.

              “We have different ideas and different work, but when you come right down to it, there is just one thing to deal with, throughout the organisation – that is the man”

–           Thomas Watson-  Founder IBM

by Dr VRK Prasad, Pro Vice Chancellor, The Icfai University, Nagaland   

Ref:

  1. Do soft skills lead to Human Excellences: T Uma Devi, HRD Newsletter Apr 2011
  2. The Deccan Chronicle, Hyderabad, 11 Nov 2010.
  3. Human Resource Management 11th edition, Garry Dessler, Biju Varkkey (Pearson)

(PP, 03-08).

  1. The Economic Times, Hyd, Nov 24, 2011.
  2. The Times of India, Hyd, Jan 11,2012

About the Author

Dr VRK Prasad is associated with management education for over a decade now, as the head of a business school, having published more than 60 papers, five edited books and two self authored books, on various topics of management.  Presently he is the Pro VC of The Icfai University in Nagaland and also holds an operational assignment as the Director of Projects in the Icfai University Group.

(The above article originally appeared in MARCH 2012 issue of BUSINESS MANAGER.)

Celebrate Decisions

I have always been happy about IBSAF and this blog is another way to connect with IBS – our Alma mater.  A pioneer in introducing practical pedagogy, some of which is been benefitting me even today – during the most difficult times of my career graph. Yes. As I write this – I am still struggling to make it large after an industry experience of almost 6 years. I am an entrepreneur. But the journey has been pleasant (with its own – ups and downs). That just means, the journey is been quite a learning experience.

Whatever we do, our decisions hold great importance and impact. Decision to be an entrepreneur is as difficult and important as a decision to join management studies. DO not get influenced – explore yourself and find out what suits you best. Is it management – do you see yourself excelling, growing, and celebrating? If you could, this is the thing for you. Similarly, while opting out and making a new choice – do the same thing. Be it choosing a course or walking out of an office to start something on your own. Check your possibilities and check the available options.

And remember! This isn’t going to be easy. But it is about making choices, it is your decision and you need to stick to it. Celebrate your decisions to celebrate life.

(Post by Jigyasa Laroiya, alumna of class of 2006, IBS Bangalore). Jigyasa began her entrepreneurial journey with her Brand & Retail Consultancy firm 30TH FEB. She is also empanelled as a Resource Person with CEDNER – IIM Shillong since 2008. 

Not a Populist Maneuver

The Union Budget of FY2012-13, presented by the Finance Minister Mr. Pranab Mukherjee, resulted in the market closing 1.19% in red. Most of the sectoral indices, except FMCG and Consumer Durables closed in red. India Inc has called this budget “a missed opportunity”.

The expectations from the Budget were low to begin with. But, while the expectations were low, wishlist was long. The table below is an example of the wish list of a few industries.

Sector

Wishlist

Cycles *Abolition of all duties
Infrastructure *Revive power sector. Extend benefit under Sec. 80IA*Exemption from MAT.*Lift the $30 bn annual cap on External Commercial Borrowing temporarily.

*Take a call on the no-go criterion for the coal blocks.

*Bring more private players into mining

Health Care *Import duty cuts on import of equipments, drugs and chemicals.*Declare it a ‘National Priority Sector’.*Make it a part of the infrastructure sector so that it can avail loans for infrastructure financing institutions.

*Increase the medical reimbursements exemption limit from Rs15,000 to Rs1,00,000/-

Viscose Rayon *Reduce excise duty from 10.3% to 0.* Retain S.A.D in lieu of Sales Tax.
Branded garment *Remove 10.5% Central Excise Duty.*Refund of Excise Duty on lines similar to refund of duties of input and finished goods.
SSI *Increase in exemption limit from Rs1.5cr to Rs5cr.
MSME *Provide more reliable and accessible internet broadband.
Real Estate *Single-window clearance mechanism for real estate projects.*Better clarity on the indirect taxes being levied on developers. *Development of a viable Real Estate Investment Trust (REIT).*Make rental business attractive for investors.

Source: Compiled from various industry associations and news reports

Everyone wanted this budget to be “not a populist maneuver”, but in the same breath, they would roll out a series of exemptions and sops that they wished for from the budget.

One thing is for sure. This budget is not a populist maneuver and as the market reactions point out, Mr. Finance Minister has not been able to satisfy everyone. And this is exactly what works in his favor.

As we can see, almost every industry wanted tax sops to continue, duties and taxes to reduce or be removed. But the finance minister has stuck to tackling the burgeoning fiscal deficit and concentrating on key areas of infrastructure, education, health and food. There is effort to contain the outflows on subsidies, containing them to 2% of the GDP. There is emphasis on removing bottlenecks for the coal, mining, roads and energy sectors, and various customs reliefs and duty cuts have also been proposed for these sectors. Create capacities for storage, increasing supplies, reducing duties and customs in the agricultural sector are truly welcome. The allocations for education and health related schemes have also gone up by more than 20% overall.

The ‘aam aadmi’ does not get too much, but should not be disappointed as well. Within limits, the budget has put something in their pockets too without taking away much. The income tax exemption limit has gone up to Rs2,00,000/- The limit for tax exemption on interests earned has gone up from Rs5,000 to Rs10,000/- The retail investor gets an incentive to invest in the stock markets, through the Rajiv Gandhi Equity Savings Scheme. Service Tax had been increased by 2% but then it was inevitable as the service tax was reduced in 2008 as sops given to tide over the financial crisis.

Black money and tax avoidance have been frowned upon. Amendments to Fiscal Responsibility and Budget Management Act, 2003, have been announced.

The government is embroiled in corruption charges, the mandate of the people in the recently held state elections was not encouraging, and the so called allies are not being too helpful either. Not much is expected from the financial year 2013-14 budget as the country goes to elections in 2014, assuming that the UPA government manages to hold on till then. This was the only chance for Mr. Pranab Mukherjee, to push for reforms, save some face by doing it, and bring India back on the growth trajectory. While there are many sectors that are disappointed for not getting any sops, the finance minister has done a pretty good job within his constraints.

Posted by Uncategorized | 1 Reply

Knowledge Knows No Barriers

Education is simply the soul of a society

as it passes from one generation to another

 – Gilbert K Chesterton

        As per Delhi University first list, the cut off for admission into current academic session of commerce stream of SRCC for non commerce students is 100%,  whether it’s fair or otherwise on students is irrelevant but the fact is, there is a clamor for knowledge, a value adding one at that. The demand for an IIT or an IIM seat is so enormous that the coaching centres are reported to be raking in more revenues than these esteemed institutions themselves.  This is while not taking into consideration the aspirants spending a year or two exclusively for getting the necessary coaching to enter the portals of the elite institutions, which by itself would lead to a sizeable figure to arrive at an actual ‘spend’ on this value based knowledge acquiring spree.

Our honorable Union Minister for HRD could not have been more right in saying ‘‘the economic prosperity of nations depends on the conquering of new frontiers of knowledge”.  It’s through education that one acquires knowledge, the transmission of which among the human race results in collective wisdom and learning. There is a vital difference between education and knowledge. Education as it is practiced in schools and colleges is a process of teaching; training and learning to gain knowledge and acquire skills while knowledge per se is “ the information, the understanding and the ability one gets to apply”  the said education. As the country is in a transition from information society to knowledge based society there is a growing need to ensure hassle free development, transfer, and assimilation of the knowledge through revamping or streamlining our education system. The gap between the supply and demand of educated work force is reported to be 10 odd million and is growing. Sadly we are struck with the age old ‘education through examination’ syndrome and in the bargain ‘knowledge’ is getting relegated to backyard. Colleges and Universities are also expected to create knowledge through research based culture but unfortunately the ground realities convey a different picture altogether. All the IITs put together enroll about 500 Ph D Scholars every year and another 4500 from all other institutions of higher learning including our 300 plus universities while China churns out ten times over with its 1000 universities. That way China might even overtake USA in the next couple of decades as the world centre of higher learning.

Knowledge Economies

Despite being the most over regulated country in the world scoring 9.16 out of 10 as per a survey on Asian business and politics by Hong Kong based Political and Economic Risk Consultancy (PERC) closely followed by China (9.04 points) India is still regarded as both a ‘knowledge economy’ and a ‘knowledge based economy’. Probably where the institutions of higher education are found wanting in creation of knowledge per se, the industries are successful in establishing their own knowledge pools and sources.  While this knowledge becomes a product in our knowledge economy, using this product as a developmental tool is what knowledge based economy is all about (Peter Drucker).  This very organizational knowledge then becomes a significant source of competitive advantage.  Knowledge as a capacity to act or apply resides within people and is of two types i.e. tacit and explicit (Nonaka and Takeuchi 1995). Tacit knowledge is subjective, personal, context specific and difficult to express, and has both technical and cognitive dimensions. Technical dimension is based on purely physical experience while the cognitive one is dependent on mental modes like values, beliefs, emotions and perceptions etc. Explicit knowledge is the one that can be expressed in words and can also be stored as data. Before we go on to the transfer or dissemination mode of this knowledge it is pertinent to discuss its creation first. The individual knowledge residing in people needs to be converted into organizational knowledge. Every department possesses its own knowledge bank and knowledge per se is not the sole prerogative of the R&D department. Each entity with all its sensory organs wide open goes through a process called ‘knowledge cycle’ where events lead to collection of data which then becomes information, ultimately resulting in what we call knowledge. These things come out of experience, reflection, conceptualization and finally experimentation which form part of a typical learning cycle (Kolb 1984). Knowledge and learning cycles are concentric and both need to keep moving if the organizations want to become knowledge based.

            Knowing is not enough; we must apply

            Willing is not enough; we must do

                                                                                     – JW Goethe

Knowledge Sharing

Knowledge that lies dormant is as good as dead, and there is little or no point in creating any, unless it is shared, applied, and further developed.  An organization should be able to build on both tacit and explicit knowledge where the most important thing is to ensure conversion of one into another to start with.  Here the concept of ‘knowledge worker’ propounded by Peter Drucker comes to the fore where key employees apply their knowledge to create new products and services and add value to their customers. The advent and emergence of technology has made it simpler for the organizations to create and disseminate knowledge, while safeguarding their own IPRs (Intellectual Property Rights) in the wake of severe attrition ridden scenario across and within the sectors.

Knowledge and HR

The transfer or dissemination of knowledge can take place through HR interventions like socialization of the employees and externalization or articulation of ideas etc, then there is a need for the employees to acquire knowledge through internalization by reading about, or even absorbing events around.  We can use yet another method called ‘combination’ where the explicit knowledge is shared explicitly or externally through all possible modes.  IT major Microsoft is believed to have developed its own model to nurture and transfer knowledge to retain competitive edge while Infosys has gone a step ahead in evaluating its intellectual capital to make a mention of it, in its balance sheet.  Creating and disseminating knowledge has become so vital and important that companies are now having Chief Knowledge Officers (CKO) whose sole job is to ensure knowledge friendly culture and flow of information.  Knowledge per se can even come from the customers too in terms of feed back which then could be used to develop new technologies as 3M and so many others did.

HR has a central and pivotal role to play both in creation and dissemination of knowledge within the organizations while the academic fraternity must make a more sincere effort in developing and furtherance of the knowledge base to augur well in our march towards becoming a developed economy.

            It takes considerable knowledge just to

            realize the extent of your ignorance

                                                                                         -Thomas Sowell

                                                                                                        – by Dr VRK Prasad

Ref:

  1. Knowledge Management Architecture (Professors Archana Shukla and R Srinivasan) Going Global: Leveraging Human Potential, National HRD Network 2000, Tata Mc Graw Hill (PP 130-143)
  2. The Economic Times, Hyd,   Dec 23, 2010
  3. The Economic Times, Hyd,   Jun 16, 2011 (TV Mohandas Pai)

About the Author

Dr VRK Prasad is associated with management education for over a decade now, as the head of a business school, having published more than 60 papers, five edited books and two self authored books, on various topics of management.  Presently he is the Pro VC of The Icfai University in Nagaland and also holds an operational assignment as the Director of Projects in the Icfai University Group.

(The above article originally appeared in January 2012 issue of INDIAN MANAGEMENT.)

Glimpses from Ibs Bangalore

We have just completed a month long competition in Human Resources at
IBS Bangalore. It seems as though a lot of time was spent but it was worth the experience as it instilled in us, the nuances of Human Resources Management in an environment which IBS Bangalore could give. The bright idea was conceived by our faculty for Human Resources, Dr. Uma Sreedhar to bring about a learning which students could get only from Industry Experts.

Recently we wrapped up a month long event in the area of HRM. Inter class
Competitions were held where we were needed to present Harvard Business Review articles, review Books and analyze the HR Industry. I must confess that it was one of the most enriching and exciting experiences to work in the presence of industry experts. For example we presented our views on the ‘IT sector and its HR practices’, to the Chief People Officer of Symphony Services which also involved the task of giving recommendations on how to improve the sector.

Though we were jittery initially, we settled down very quickly as our eagerness to learn got the better of our anxiety! Eventually we came out smarter, brighter and definitely stronger, ready to face the industry challenges.

Contributed by Soumya Ramesh (Class of 2013, IBS Bangalore)

Reining in the Fiscal Deficit

The government is embroiled in corruption charges, the mandate of the people in the recently held state elections was not encouraging, and the so called allies are not being too helpful either. Not much is expected from the financial year 2013-14 budget as the country goes to elections in 2014, assuming that the UPA government manages to hold on till then.

So the budget being presented tomorrow by Finance Minister Pranab Mukherjee, might be the only chance to push for reforms, save some face by doing it, and bring India back on the growth trajectory. One of the primary concerns this year is to rein in the Fiscal Deficit.

Last year, Mr. Mukherjee had said that the government would target a budget deficit of 4.6 per cent for 2011-12, compared with the 5.1 per cent expected for 2010-11. We are nowhere close to the targeted figures. Subir Gokarn, the Deputy Governor of RBI has predicted that the Fiscal deficit would be close to 7% by the end of March 2012. The government badly missed their own revenue and expense predictions. Government borrowing has been increasing. This has resulted in high interest rates. On the one hand the government is not able to control expenses; on the other hand, it is not doing much to improve revenues.

The four areas, which are being talked about and are very likely, the budget may target to rein in the fiscal deficit are Subsidies and welfare schemes, Foreign Direct Investment, non-tax revenues and tight fiscal management policies. Let’s look at the state of and the challenges facing each one of these areas.

Subsidies and welfare schemes: Year after year, the government has rolled out more and more subsidies (fuel, food, fertilizers) and welfare schemes (MNREGA, NHRM) for the people that have now turned into giants, with ever increasing appetite for cash. Various subsidies account for close to 3% of the GDP!

On the one hand, the government spends close to Rs55,000cr in food subsidies every year, on the other, the estimated wastage of food in an year is close to 60 million tones, approximately 20% of the total production. The prices of diesel and fertilizers are far from reality and decontrolling them or reducing the subsidy might result in early polls. Apart from this, there is lack of transparency about how the money is spent on various welfare schemes. Accountability and achieving the targets should be the key words in such schemes, but they are not!

Foreign Direct Investment: FDI in aviation, retail, insurance, and infrastructure are all pending since long and need urgent attention. There are benefits to be gained from FDI apart from the capital, in terms of technology, expertise, backward and forward linkages etc. Simplifying processes for the foreign investors, reducing the number of days taken to conduct business and set up operations could all go a long way in attracting investors. Though it might now be difficult to build consensus in the Parliament and it may be impossible to push through bills like FDI in multi- brand retail.

Non-tax revenues: Divestment or sale of stake in Public Sector Undertakings is one way to raise money without putting burden on the common man. The Government failed miserably in this last year. The recent example of investors shying away from ONGCs follow-on public offering and LIC being ordered to pick up the shares to save the offer from falling through is a case in point.

Tight fiscal management policies: Except the Non-Direct Tax collections, the government has fallen short on almost all other forms of Revenues collection. The estimated shortfalls for the FY2011-12 are Rs20,000cr in Direct Taxes, Rs35,000cr in Non-Tax revenues, Rs27,000cr in Divestments and Rs37,000cr in Non-Debt Capital. The expenditure has been as budgeted to a great extent, in fact it might be lower than budgeted as on the year end. With transparency and good governance, proceeds from divestment could go up. Measures to improve the tax and non-tax collections have to be put in place, including coming down heavily on corruption, which might be leading to money going into private coffers rather than the exchequer. Voluntary Disclosure Schemes or Amnesty Schemes could be put in place to encourage people to bring back the black money stashed away in tax havens.

Overall it seems that the fiscal deficit situation that we have gotten into is mainly due to mismanagement and poor planning. Taking calculated and tough stand and having clarity in the policies will definitely help rein in the fiscal deficit.

The Wish List

The Union Budget of FY2011-12, presented by the Finance Minister Mr. Pranab Mukherjee, resulted in the market going up by close to 3% and breathing a sigh of relief for not having been burdened with more taxes or duties. Ofcourse, there was nothing to rejoice about at the same time. But at least status quo does not imply being worse, if not better!

The expectations from the Budget of FY2012-13 are low and the stage is set with the monetary policy review dampening the sentiments of the markets today. While the expectations are really low, wishlist from the Budget is long. And that might work in Mr. Mukherjee’s favor, if his budget shows even a slight sliver of hope for reforms.

Everyone wants this budget to be “not a populist maneuver”, but in the same breath, they roll out a series of exemptions and sops that they wish for from the budget. One thing is for sure. This budget will not be a populist maneuver, because whatever Mr. Finance Minister does, he will not be able to satisfy everyone. The table below is an example of the wish list of a few industries.

Sector

Wishlist

Cycles *Abolition of all duties
Infrastructure *Revive power sector. Extend benefit under Sec. 80IA *Exemption from MAT.*Lift the $30 bn annual cap on External Commercial Borrowing temporarily.*Take a call on the no-go criterion for the coal blocks.*Bring more private players into mining
Health Care *Import duty cuts on import of equipments, drugs and chemicals.*Declare it a ‘National Priority Sector’.*Make it a part of the infrastructure sector so that it can avail loans for infrastructure financing institutions.*Increase the medical reimbursements exemption limit from Rs15,000 to Rs1,00,000/-
Viscose Rayon *Reduce excise duty from 10.3% to 0.* Retain S.A.D in lieu of Sales Tax.
Branded garment *Remove 10.5% Central Excise Duty.*Refund of Excise Duty on lines similar to refund of duties of input and finished goods.
SSI *Increase in exemption limit from Rs1.5cr to Rs5cr.
MSME *Provide more reliable and accessible internet broadband.
Real Estate *Single-window clearance mechanism for real estate projects.*Better clarity on the indirect taxes being levied on developers. *Development of a viable Real Estate Investment Trust (REIT).*Make rental business attractive for investors.

Source: Compiled from various industry associations and news reports

 

As we can see, almost every industry wants tax sops to continue, duties and taxes to reduce or be removed. But the finance minister has no magic wand and must tackle the burgeoning fiscal deficit. Hence, exemptions and indirect-tax reductions may seem farfetched. Though, the budget may actually pave way to implement the Direct Tax Code (DTC), taking at least small strides this year.

Increasing the personal income tax limit from Rs1.8/1.9 lakhs to Rs3 lakhs, increasing the Sec80c exemption limits, hiking the slabs for tax rates will all put more disposable income in the kitty of the common man.

Rising inflation, rising prices of food, petrol, LPG, had the households scrambling to cope throughout the last year and they do not expect this year to be different. The common man is worried about the sky rocketing education and healthcare costs, rising housing costs and declining amenities. They are looking at Mr. Pranab Mukherjee to ensure that they can plan their monthly budget with more precision and have improved standards of living.

Create capacities, reduce wastage, improve infrastructure, to increase supply in the agricultural sector. Have more clarity on the prices of fuel. People are confused. Are the Oil prices really independent? Will the diesel prices be deregulated? Why are we paying more and getting less of everything?

All these questions concern the common man and giving income tax sops alone may not be enough to enthuse them to vote you back Mr. Finance Minister.

Do Family Businesses Really Last Long?

One of my professional friends asked me yesterday for my views on the sustenance of family businesses. He believes that family businesses, including his wife’s family’s, do not have a chance for survival because of the inherent weaknesses of the family business system. I told him that there is no dispute about the internal contradictions in family business such as absence of choice of the family to be born into for anyone unlike joining a publicly owned corporate. However, since family is an integrated unit with love and caring among its members, I said, the idea is to make a lasting pool of love and wealth with the family business lasting longer. The discussion progressed on to institution building. We agreed that institution building is not at all easy and there are only a few institutions that have survived the test of time.

Besides having a clear strategy, organizations need a clear balance among structure, systems/processes and values on a dynamic basis to become institutions, besides a clear vision and the team. It i not easy but it is possible! We try to practice the best values of all religions though we know that it is not easy, primarily because we feel happier that way. I am convinced that trying to reach the ideal forces us to reach somewhere near it. If our goals are much lower, there is a huge chance of our attaining something mediocre. Hence, if keeping unity and tolerence of family business is our goal, we should try our best to attain the same and not get disheartened by the break up stories of some families.

Author : Dr. Kavil Ramchandra, Thomas Schmidheiny Chair Professor of Family Business and Wealth Management, Indian School Of Business Hyderabad.

A Futures Contract on Real-estate?

If you are wondering why such trading hasn’t taken off in India, it is because these transactions need a lot of ground work to be put in place first.

“Why don’t we have a futures contract on real-estate to hedge the risk of land prices going down?” asked Rahul, a quiet but sharp student. Professor Nicky was taken aback by his question. Where most of the students in her class had difficulty understanding the basic concepts of hedging, this young boy was asking about an instrument which was, well, not so simple, to say the least.

Professor Nicky turned the question to the class to test how much the class knew. And she was in for a pleasant surprise. There were a few hands in the air.

Rachna: “It will be difficult to introduce real-estate futures because the valuation of the underlying product would be difficult. The real-estate market in India is highly fragmented. The prices of land differ widely based on factors such as location and usability, that is commercial, industrial, residential or agricultural”

Praveen added: “Besides, such a market would be very illiquid in India as only prime commercial and residential properties would probably be traded.”

Index of prices

“But, what is the problem here?” interposed Rajshree. “Can’t we create an index of real-estate prices? Just like we have stock indices? We can club the properties belonging to a particular city according to property types”.

Professor Nicky saw a few perplexed looking faces and decided to intervene even though she was happy with the way the discussion was proceeding. She took over from where Rajshree had left.

“See, just like we have an index for FMCG companies or IT companies or banks, similarly, we can create an index of real-estate Prices. Of course these indices will be city or region-wise indices. We would need to determine a base year”.

“Since it would be very tiresome to include all residential property transactions in the index, we take transactions that are above a minimum amount of, let’s say, Rs 25 lakh. Now we can take a weighted average of all the transactions on a weekly or a fortnightly or monthly basis to find the changes in the index.

“However, the index may not give a true and fair picture as the recorded value of these transactions with the government is generally very low to save taxes. But then, it will still be better than having nothing. And slowly, as we move ahead and learn, the issues of heterogeneity and pricing will be sorted out”.

“Ah! If I recall correctly, Chicago Mercantile Exchange and Chicago Board of Trade have such futures traded on such contracts for cities such as New York and Los Angeles. In fact, they also have futures contracts on Real Estate Investment Trusts” exclaimed Richa.

“The students have really started reading,” thought Professor Nicky. “With the job scenario being bleak, many students have become serious and are trying to read more so that they can have an edge over their batch mates in an interview”!

Benefits of futures

“Yes, both the US and the UK have real-estate futures traded on their commodity exchanges for most of the major cities in the country. But can somebody tell me what the benefits of real-estate futures are?” asked Nicky.

Before Nicky could point towards a raised hand, Rohit rattled off, “Hedging for investors and builders, diversification, price discovery, increased information availability and flow, investment tool…”.

“Okay…okay…enough…so all of you are aware of the benefits of real-estate futures. But who has heard of the London Fox?” Thankfully no hands went up this time. Nicky was almost beginning to feel that she was not required in the classroom at all as the students had answers to all her questions.

Keeping them at bay

“London Futures and Options Exchange (FOX) started trading in four property futures contracts in May 1991 and had to suspend trading in October 1991. The reasons were mainly that these contracts were not economically viable. Arbitrage was not possible as short-selling is not allowed in the underlying spot market, which is true in India also.

“Also, the housing indices for various cities would be highly dependent on each other, albeit with lagged effect, due to the cascading effect in the real-estate markets. The transaction costs were also huge, which kept the investors and hedgers at bay.

“Hence, before introducing these futures, the government will have to do a lot of ground work to ensure that they work efficiently and provide the desired benefits to investors and hedgers”.

The class looked satisfied. Everyone had contributed something and everyone had learnt something new. Nicky looked proudly at her students and called it a day.

By Nupur Pavan Bang with inputs from Praveen, Rachna, Rahul, Rajshree, Richa and Rohit.
About the contributor: Nupur is a Post-Doctoral Fellow at the Indian School of Business. She obtained her Doctoral degree from Icfai University, Dehradun. Nupur is a Fellow of the Association of Chartered Certified Accountants, UK. She has also taught Theories of Corporate Finance to undergraduate students at Syracuse University. Nupur writes regular columns for Hindu BusinessLine, DNA Mumbai and rediff.com.

(Praveen, Rachna, Rahul, Rajshree, Richa and Rohit are all alumni of IBS Hyderabad, class of 2009.)