My article on this topic.
I wonder how long we Indians will be taken for granted. We have a tendency to get attracted to lower prices (well, we consider overpaying as a personal insult). Yet we allow some practices to run with alacrity.
Consider this trend: There is a product, say a pair of jeans with an MRP of Rs 1000. The retailer (online or offline) announces a discount of, say 20% and then clarifies (in small font) that VAT would be applied on discounted products. At 5% VAT, the tax component comes to 800 x 0.05 = Rs 40.
The retailer charges Rs 840 after giving a discount of 20% on Rs 1000. A third grader can calculate that we are getting only 16% discount and not 20% as marketed. In what kind of mathematics impaired world do we live?
VAT is already built in the MRP. They calculate the price by discounting it, and then add the VAT again. Do they pay double tax? Hell, no! They just like to give us lower discounts but promise higher.
Unfortunately, retailers have been successfully running this show for some 4 years now.
Coming to formulas, let’s assume V is the VAT rate and D is the discount rate. The calculations would be:
Final price: MRP x (1 – D) x (1 + V)
Hence the discount is MRP – final price, or
MRP – MRP x (1 – D) x (1 + V), which comes to
MRP x (D-V+DV)
The effective discount rate = (D-V)+DV
The loss of discount due to the above strategy = V (1 – D)
So, in our above example, the effective discount rate = 20% – 5% + 1% = 16% and our loss is 5 (1-0.2) = 4%
I have plotted a graph comparing the advertised discount and the impact on VAT on the effective discount. I have considered 5% and 14.5% considering the two VAT rates are applied across India.
We can observe the following:
- When VAT exists, the effective discount is lower than the advertised (as expected, since we lose V(1-D).
- A lower discount and a higher VAT would make the effective discount negative, which means the prices would be higher than MRP which is not possible since that would be illegal
- A higher VAT implies greater loss (directly proportional to V). This can make the difference substantial (and raise eyebrows).Hence you will probably not find this technique with consumer durables (which are taxed at 14.5%) but with textiles (lower 5% VAT)
- When discounts are higher, the difference is not really much. This is probably why high discounted merchandise (say end of season sale on apparel where discounts can go up to 60%) is a wonderful opportunity to play this game.
In short, businesses are cashing in on the consumer’s behavior: treating values smaller than 5% as loose change.
The ideal consumer products for this discounting and tax game are those which have
- Higher margins (to allow discounts)
- Lower VAT
- Inelastic demand (People don’t mind paying more)
This includes branded apparel, footwear, electronics and many more (I am no tax expert). No wonder Shoppers Stop and its competitors are cashing in making this an industry norm.
There is a point at which the effective discount can be 0. At this point, we will have (D – V) + DV = 0 or D = V / (1+V)
When V = 5%, we can have a discount of D = 4.76% from the above equation.
Imagine a marketer saying “We are giving you a blockbuster discount of 4.76%, but unfortunately you have to pay VAT”. The final charges will be the MRP, then hopefully consumers will wake up and ask, “Where is my discount?”
Online Pricing: The Dilemma before Electronics Brands
Interesting article . I believe its time offline retailers start accepting the online wave.
Today, every company has an IT strategy in place, thanks to the proliferation of ERP and the ever increasing sophistication of IT systems.
Some conglomerates having good bottomlines tend to secure their IT service reliability by spinning off companies which provide IT services to the core businesses. Such spin offs are either owned 100% by the parent or have a promoter holding of the parent. Some notable examples are ITC infotech, L&T infotech and Tech Mahindra, which have evolved into full service IT companies and do not depend exclusively on the parent for their revenues.
On the other hand, there are IT companies whose only source of revenue are the charge backs or internal payments from group companies for the services rendered. To avoid complications of transfer pricing, such companies have fixed hourly rates. Group companies are mandated not to receive IT services from outside, so service companies’ revenues are locked. Their charge back rates are normally higher than the market determined arm’s length prices.
This is a classic example of backward integration where a critical support service is managed from within the group. While the merits of such a setup are many, one of the demerits highlighted by Michael Porter is the ‘dulled incentives’ of the management. In his book, Competitive Strategy, Porter says, “The incentives for the upstream business to perform may be dulled because it sells in-house instead of competing for the business”
Due to the above features, the management of such companies end up managing costs rather than revenues or profits. Because of higher charge back rates and focus on the net profit obviated, they have higher expenditure budgets, which in turn implies more benefits for the managers and employees. Often this results in over hiring, which may result in employees fighting for assignments. Over hiring of managers would imply each manager tries to prove his/her importance and vehemently protect their fiefdoms, resulting in internal rivalry. Knowledge workers, who need food for thought struggle to keep themselves updated and engaged, face the dilemma of making a choice between benefits (that come from high budgets) and intellectual and professional growth (which is stunted since the work quality and quantity is poor).
This results in poor morale of the employees, resulting in high attrition rates. However, high budgets ensures arrogance of the management to get quick replacements, instead of looking into the root cause of the problem. The much desired positive spirit is lost and everyone is frustrated.
The way out of this is to either follow good transfer pricing practices (like negotiation between the IT service provider and the consuming company) or by allowing the IT service company to venture into the market to gain business and satisfy its shareholder(s) (termed as tapered integration by Porter). This will ensure that the service company’s hurdle rate is referred to while making any investment. Professional companies named above do the same, and are in a better position than the ones who do not.
I wonder how Porter knew in 1980 the issues which managers are facing today.
Ebooks have become more of a fad in the past few years, thanks to the proliferation of the devices like kindle. Until 2012-13, ebooks never took off because kindle and its likes have been prohibitively expensive, and reading from a computer screen isn’t the most soothing for the eyes.
Yet with the introduction of tablets and smartphones with bigger screens, things are changing. Till sometime ago, e books to me were nothing but pdf documents downloaded (for free) over the Internet. These pdfs were great on the computer screen, and not too good for reading a novel (though great to fool the boss that you are doing something productive in office). And so the rule was: if I want to read a reference text (like wikipedia), I’d prefer online, but if its a novel or a text book, I would like to have the ability to read it while lying supine.
During my visit to Nigeria, and I met someone who was reading a novel on an old tablet (technologically outdated in 2 years). He couldn’t get a physical copy of ‘The immortals of Meluha’, so ebook was the only option. I found the concept mesmerizing. My recent technological upgrade to a nexus 7 introduced me to the concept of kindle app and google play and the ability to buy ebooks just like I would order physical books from flipkart.
I fell in love with it! And that’s because I found that it is:
Convenient – I do not need to carry (and dump) novels after reading them (think about lugging around multiple paperbacks)
User friendly – I can change the font size, the width of the line or spacing, brightness to suit my eyes and brain
Highlightable – I love marking important passages
Searchable – Now thats where technology comes in
Audible – A lot of apps can convert text to voice
Syncable across devices – That’s unique to ebooks. I read a novel on my tablet till page 277 and if I wish to continue reading on my laptop at office, I can do that due to its auto sync to farthest page read feature and ability to store bookmarks across devices
Editable – Yes, I can add comments just as easily like I would mark in a textbook using a pencil. These edits are visible when I view my ebook from anywhere.
Environment friendly – This goes without saying, cutting trees for paper isnt the best way to save the earth, nor is the logistical expense of printing and transporting books to the points of sale.
Copyright enforceable – But this is a tricky area. Digital rights management works but I hear that DRM can be stripped off and distributed. Not a good sign for authors and publishers.
And finally, cheaper – Because of its wide presence, differential pricing for the Indian market may not work, but they are still at par or slightly cheaper than their print counterparts. However, the difference is substantial in developed markets like the US. With the Indian market getting younger and eager to accept technology, ebook prices may fall further.
Some people still prefer paper books for the sake of legacy, but times are changing.
There are number of apps available for a tablet user (apple/android)
– Google play
I found that amazon’s prices are lower than on google play. So whichever you choose, do it wisely.
A 7 inch tablet weighing less than 350g is ideal for ebook reading. There are many options in this range, make sure the battery life is good (ebooks do not consume a lot of battery anyway).
Going forward, I can see many great works getting converted to the ebook format. It would be interesting to see them coming.
I wouldn’t be surprised if school students these days read Shakespeare or Charles Dickens on tablets!
Cobrapost informed us in many words, images and videos that such a website exists. All one could learn from the clandestine conversations what there the rules and systems, though fairly designed is not strong enough to check money laundering. A person deposits cash of 7-9 lakh in a bank with a copy of the pan card. The bank has no business in investigating his source of income, it is the income tax department`s prerogative. Bank officials know the weaknesses of the rules are are exploiting them. One may call it tactical.
Whenever I am on a plane and the landing is announced, I start feeling a little anxious about the impending touchdown. For there have been times when I have experienced a rough landing. Often we term such a landing as “hard landing”. Now the term hard landing has now found its way into economic dictionary.
So what does hard landing of the economy mean?
To understand this let’s look at why the aircraft has a hard landing. A hard landing occurs when the aircraft impacts the ground with a greater vertical speed and force than in a normal landing. Hard landings can be caused by weather conditions, mechanical problems, over-weight aircraft, and pilot error. The term hard landing usually implies that the pilot still has total or partial control over the aircraft.
Now let us compare this with the hard landing of the economy. The economy of a country is healthy when it experiences good levels of consumption and investments and when the mood of the people is exuberant. These are times when the economy experiences growth. As growth rates increase due to high consumer demand, prices of goods and services start to rise. This is an inflection point because the gates of the economy open up to inflation. Hereafter the central bank starts to apply the brakes by raising interest rates to start slowing down the economy gradually. Here the word, “gradually” assumes a lot of significance because the job of regulating interest rates by the central bank is indeed a very delicate one.
To understand this a little better, just imagine if the pilot were to inadvertently apply the brakes of the aircraft too hard. The consequences of such an action could be very damaging and the pilot could lose control over the aircraft causing it to skid and crash. Thus the pilot needs to regulate the brakes in such a manner that the aircraft lands smoothly.
In the same way, the central bank raising interest rates is akin to applying the brakes of the aircraft. If an increase in interest rates are regulated well, then slowly but steadily the economy will slow down and inflation will gradually get harnessed. Otherwise, the economy can go out of control and experience a sudden slowdown caused by undue negative sentiments, sudden slowdown in investments and slowdown in consumption and so on and so forth. This would cause immense pain in the economy due to low capacity utilization, job losses, and defaults, etc. This pain caused by mismanagement of the monetary policy is termed as “hard landing” of the economy.
Hope this analogy of the economy with an aircraft would have helped you get a decent grasp over the term “Hard Landing” of the economy.
Though the example below cites currency hedging, it is true for F&O segment as well.
There is a village known as Champak. The village is well known for the intelligence of its people. Chameli is one smart girl of the village and Chatur a smart young man, is keen to marry Chameli. However, Chameli is unwilling to commit. She sets her condition that she might consider marrying him but would confirm only after one year.
She comes up with an idea and makes an offer to Chatur.
She suggests that they draw up a contract which states that at the end of the year she might consider marrying Chatur but there would be no obligation to do so. For signing up the contract, she would pay Chatur a sum of money. As part of the contract, Chatur has to stay within bounds and not persuade her during this period.
If one sees this situation from Chameli’s perspective, it appears that she is “Hedging” herself or we may say she is “covering her risks” for a sum of money. Chatur on the other hand stands a chance of marrying Chameli after a year and the sum of money that he gets for the contract becomes the icing on the cake.
However, let us examine the scenario in the event of Chameli not marrying Chatur.
Chameli would use her option of not marrying Chatur if she happens to find a groom more eligible than Chatur. The only price that she would have to bear for this decision is the sum of money that Chatur would get on account of the contract.
So by offering this money, she covers her risks by ensuring that she enjoys the option of marrying either Chatur or somebody better. Chatur has a reasonable chance of marrying Chameli at the end of the year, but if that does not occur he at least gets to pocket the money.
Hedging of currency risk is similar to this story. Let’s say Chameli places an order to buy foreign machinery at a million dollars at the end the year. As per the contract, she will need to make the payment at the end of the year. Now let’s say the value of a million dollar is 5 cr. rupees at the time of signing the contract.
At the end of the year the value of the dollar rises by 10%. Now she would have to cough up additional Rs. 50 lacs for the machinery (Rs 5.5 cr for a million dollars due to price appreciation).
This increase in cost is not good for her business. And she looks for ways of covering such currency risk. Instead of risking what could be Rs 50 lacs, she buys a call option (you always buy a “call” option but sell a “put” option).
This option in essence gives her the option of either purchasing a million dollars for Rs 5 cr. or else allowing the option to expire. Logically, if the value of the million dollars falls below Rs 5 cr, she would allow the option to expire. But if the value of the million dollars goes up beyond Rs 5 cr, she would execute the option.
For getting the benefit of this protection, which is popularly expressed as hedging in the financial terms, she would naturally have to pay a fee or price. Let’s say this is Rs 5 lacs (This is just for the sake of illustration. The exact price of the option etc. is beyond the scope of this lesson).
So by risking Rs 5 lacs, she gets the option of purchasing a million dollars either for Rs 5 cr. or less but certainly not more. And for this she would have to pay Rs 5 lacs. If the price of a million dollars were to drop to Rs 4.95 cr. then she would also recover her fee, (Rs 5 lacs) and if the price were to drop to Rs 4.9 cr., she would end up making a profit of Rs 5 lacs. (Her total cost would then be Rs 4.9 cr for a million dollar + Rs 5 lacs as the fee = Rs 4.95 cr. which is Rs 5 lacs less than the agreed price fixed a year ago.)
Otherwise she would risk only Rs 5 lacs in the deal for which she would get a peace of mind by ensuring that the exchange rate for her does not change over the year. This is popularly known as covering the currency risk by way of hedging through the purchase of call options.
Another excellent article from Prof Simply Simple. The original link is here
The word “quantitative easing” more commonly known as “QE” made a grand entry into our lives along the media highway. We had the QE 1 and then the QE 2 by the Federal Reserve to revive the US economy.
What is this QE all about? To understand let’s look at a simple story.
Let’s say there was a prosperous village – Suskhsagar. Most of the villagers were into agriculture. Their lands were fertile and the farmers were happy. The village had good schools, shops, entertainment hubs, hospitals, municipality etc. Then one day, a pundit, who enjoyed the confidence of the villagers, visited the village. The villagers believe that the pundit was blessed with the knowledge of the future and could predict their future.
One evening, the pundit called an urgent meeting for the villagers to tell them about their future. This kind of meeting had been a regular feature in the village and most people attended it because the pundit’s prediction often was accurate.
So while he addressed the villagers, the pundit dropped a bombshell. He told the villagers that the future appeared very dark. He expected that the villagers would soon lose their jobs and source of livelihood. Their incomes would vanish. Therefore, time had come for them to store all that they had so that they could overcome the bad times.
The petrified villagers acted upon his instruction without any further delay. They began to save their money like there was no tomorrow. The villagers were in a state of shock. It appeared like the smiles had been erased from their faces. People stopped spending money and just focused on saving.
They were in no mood to visit the entertainment hub. Nobody visited the market to buy anything. Markets wore a deserted look. Even people stopped visiting the hospital except for emergencies. The fear of losing their jobs and source of income was sucking out every aspect of happiness from their lives. The demand for all goods and services nosedived. The producers of goods felt the pain and reduced prices to get some hold of their lives. But the demand simply did not lift up. Clearly, negative sentiments had come to enshroud the entire village that led to a standstill of economic activity.
One day, a government official passed through the village and wondered to himself how Sukhsagar village turned into Dukhsagar village. He talked to the village elders to understand. After listening to them, he made an attempt to dissuade their fears by informing them that there was no imminent danger of bad times befalling on them. But the villagers continued to embrace fear. After all they had more faith in the Pundit than the government official. The official had realized that the villagers themselves were making things bad. Seeing that his advice was falling on deaf ears, he invited another learned person to address the villagers. But all his efforts were in vain.
Soon the villagers started suffering. Although they had money stocked up in their houses, it meant little. The producers of goods and services due to the demand slump had either closed shop or left the village. So now there was even a shortage of goods. This meant that even though there was no demand, the prices had stopped falling. So while everyone had money in their homes, there was no economic activity. Without economic activity the markets had dried up just like a car would get stalled without petrol. How does it make a difference to the car if there is petrol in the pump but not in the engine? Just as the engine of the car running dry and coming to a standstill, so did the markets in the village in the absence of money that did not reach the markets even though there was plenty in the homes of the villagers.
There was only pain and misery left in the village. Although there was no external threat to their jobs but the peculiar behavior of the villagers to save money and stop buying goods and services was turning out to be the cause of job losses. So in a sense, the behavior of the villagers was making their nightmare come alive.
The government official was afraid that the villagers would destroy themselves if they continued on this path. So he thought of an idea to release the village from this grip of negativity. He made an unprecedented announcement to jolt the villagers into action.
The key parts of his announcement were:-
|This announcement was manna from heaven for the villagers.
The assurance of easy money made them realize that it was futile to hoard money in their homes. The announcement encouraged them to buy goods and services from the market. This led to an increase in the demand for goods and services. Soon, the producers of other goods and services who had fled from the village started to return in large numbers. The entertainment hub also sprung into action.
The economic engine sputtered into action just as a car engine would when supply of fuel resumes.
The sentiments of the villagers took a U turn from negativity to positivity and Dukhsagar once again turned into Sukhsagar.
This process of releasing money into the hands of people to revive sentiment and getting people to actively participate in economic activity is what is popularly known as, “Quantitative Easing”. Quantitative easing literally means easing (or increasing) the supply of money in the economy. This is done by printing additional currency.
The cheap money released becomes an incentive for the people to consume and invest. While consumption increases, the demand for goods and services infuses life to the production process, investment provides the credit to build manufacturing capacity for goods and services so that the rise in demand does not lead to high inflation. Thus changing sentiments is a self fulfilling prophecy that helps the economy to gain momentum and sustains itself. The moment sentiments change, people are inclined to hoard less and inject more money into the economy. The infused money acts as the lubricant for the economy to chug along smoothly.
There is a difference between the price of a share and its intrinsic value. This is because while the share price represents a company’s valuation, it is dependent on several macro – economic factors as well. So it is not just the performance of the company that matters. Also when the profitability and outlook of profitability comes down, the price can follows suit because “price of the share of a company” is a function of profitability expectation of that company. Below are the various parameters that have a bearing on share prices.
|1)||Inflation: When inflation is high, people have less money to buy goods. Hence the demand for goods and services comes down. This reduces profitability of companies which in turn brings down the price of shares. Also when inflation is high, the input costs for companies soar and many times companies do not pass this increase on to consumers. At such times, the company takes a hit by way of margin squeeze which brings down both profitability and share price.|
|2)||Interest Rates: When interest rates go up, companies are directly impacted as their interest costs increases. This may bring down profits and the outlook of future profits if the high interest rates are expected to sustain. When profit outlook comes down, the share prices too tend to move down.|
|3)||Currency Devaluation: When currency gets devalued or expectations of devaluation sets in, the interest of foreign investors could start to decrease. For example, if an international investor invests $100 when the value of the rupee was Rs 50 (this means the person bought Rs 5000 from the $100). Subsequently if the value of the rupee decreases to Rs 55 to a dollar, then one can only recover about $90 from the Rs 500) which one purchased. Thus the returns are adversely impacted in a depreciating currency scenario. Hence during such times, foreign investors are hesitant to invest and cause foreigners to sell off Indian shares, converting the proceeds into dollars and fleeing Indian markets. This sale of shares initiated by them would bring share prices down.|
|4)||Government Spending: A government that borrows in excess and overspends reduces the money available in the system. Private companies either have to make do with limited finance which hampers its growth plans or it has to borrow at higher interest rates which brings down its profit growth outlook and hence its market capitalization (price). This phenomenon is what is popularly termed in finance as “crowding out” of private investments. Also one must understand that overspending on part of the government can lead to inflation if the supply of goods and material is inadequate. Inflation itself has an adverse impact on share prices as explained in the section on “inflation”.|
|5)||Fiscal Deficit and Current Account Deficit: When the government spends more than it earns (imports more than it exports), it either borrows at higher prices which raises interest rates in the economy or it has to print notes to meet the deficit. In the case of printing currency without equal economic activity, the value of money goes down or in other words “inflation” kicks in. Thus higher interest rates, inflation and devalued currency impact cost of input and demand of goods and services unfavorably. This impacts company profitability and brings down share prices.|
|There are several macro – economic factors that influence share prices. Secondly, these factors are inter-related and these factors play a vital role in creating negative or positive sentiments among investors as the case may be. So even if a company is performing steadily and having reasonable operational profits, the macro – economic outlook plays a significant role in determining its share price.|