Indian Markets May Be Hit By Wall Street Blues

• (00:00) Stories Of The Day
• (00:50) Indian Markets May Be Hit By Wall Street Blues
• (02:47) How Many Players Does India’s Telecom Sector Really Need?
• (05:51) Kotak’s Technology Fuelled Bets And A TCS Announcement On AI
• (12:28) How Practical Is Inheritance Tax?
• (23:33) Why Its Getting Tougher To Get Away With Misleading Product Claims

NOTE: This transcript contains only the host's monologue and does not include any interviews or discussions that might be within the podcast. Please refer to the episode audio if you wish to quote the people interviewed. Email [email protected] for any queries.

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Indian Markets Could Be Hit By Wall Street Blues

The stock markets gained for a fifth consecutive session on Thursday. The big winners were earnings driven and included Axis Bank and Nestle India and SBI hit a fresh all-time high and ended 5.2 per cent higher at Rs 813.

Kotak Mahindra Bank crashed after the Reserve Bank of India banned it from adding clients digitally. More on that shortly.

The BSE Sensex see-sawed today, opening down,hitting a high and then closing with a gain of 486 points at 74,339. 

The BSE Sensex has rallied 1,849 points in the last five straight trading sessions.

The NSE Nifty touched a high of 22,626, and finally settled 156 points higher at 22,559.

Wall Street was disappointed with an earnings report from Meta Platforms, owner of Facebook.

Shares of Facebook’s parent were down as much as 19% after Meta forecast weaker-than-expected sales in the current quarter while targeting higher capital expenditures, including in AI.

Macro data points from the US were not very strong either. The Dow Jones was 600 points down at open and bonds fell as well. 

U.S GDP was weaker than expected for the January to March quarter and prices rose at a faster pace, the Commerce Department reported Thursday.

US GDP increased at a 1.6% annualised pace when adjusted for seasonality and inflation, according to the department’s Bureau of Economic Analysis. The expectation was 2.4%. So both growth and inflation are a continuing concern.

More tech results are on the way including from Alphabet, Microsoft and Amazon and Wall Street is on the edge, a factor that may play into markets in India as well.

How Many Telecom Companies Does India Need?

How many telecom companies does India need? Depends on who you ask and of course when. 

If you posed this question in the 1990s, the answer could have been a handful, just in one city. One of the many, for instance, was BPL Mobile, then run by now India’s IT Minister, Rajeev Chandrasekhar

Skill Development,Electronics & Technology, Jal Shakti - cellular pioneer

If you ask the same question today, the answer is a handful, with a small difference, which is for the whole nation. 

And if you ask Aditya Birla Group Chairman Kumar Birla, he would say and say India deserves three private telecom companies.

The struggling Vodafone Idea is obviously the third one.

The company and stock has been in the news because it has raised Rs 18,000 crore through a follow-on public offer (FPO) Vodafone Idea's new shares were listed on the stock exchanges and were trading marginally down at Rs 13.09 a share.

According to Kumar Birla, the Group has stuck around for over two and a half decades now and has, along with Vodafone Group, cumulatively invested around Rs 170,000 crore in the Indian telecom industry. 

The interesting part of the Vodafone story is of course the Birla Group pretty much walked out of the company.

Three years ago, as Vodafone struggled and was on the verge of bankruptcy, Kumar Mangalam Birla quit the board and offered to give away the company to the government. 

Nothing like this or at a company of this size had happened before in corporate India.

Birla’s move, possibly borne out of sheer desperation and fear that other cash rich companies in the group would suffer, worked.

He returned in April last year or 2023 after a government rescue package allowed telecom firms to pay their dues in equity, according to a Bloomberg report.

So the Government of India is now a 32% shareholder in Vodafone Idea, the only company to avail of the debt-to-equity conversion option. That stake will fall to about 23% after the fundraise.

The history as a Bloomberg piece by columnist Menaka Doshi points out is also a story that speaks of the policy risks of doing business in India, including licence cancellations by the Supreme Court following corruption charges in 2012. 

The period also saw several top telecom executives go to jail, 

The launch of Mukesh Ambani-led Reliance Jio's cut price service in 2016 hurt the profitability of the existing competitors but also set off a data and smartphone boom .

In 2018, Vodafone India and Idea Cellular, an Aditya Birla Group company, merged with each other. 

And thus India's telecom industry was "down to 2.5 players" as Sunil Mittal founder of Bharti Airtel the second largest company, described it in a reference to Vodafone Idea. 

India deserves to have (at least) three players, Mittal had said. 

Which brings us back to the three company remarks that Birla made yesterday.

Of course there is a fourth player and that is the Government which is an equal source of discomfort for private players.

So what perhaps both Mittal and Birla are saying is that they need more private players as well, also to balance out the Government’s BSNL or MTNL services.

Kotak And A TCS Announcement, Technology’s Perverse Effect

Two somewhat disparate events happened yesterday.

Kotak Bank’s stock crashed 11% after the Reserve Bank said the bank had to stop issuing new cards and also stop soliciting customers through online portals.

The second aspect is a little more relevant to our discussion today.,

In the second instance, TCS CEO K Krithivasan said that AI would replace most call centre jobs in a year.

This prediction made to the Financial Times, London is somewhat frightening, mostly to the people who work in the lower end of its BPO or business process outsourcing division. 

Let's return to Kotak Bank.

The RBI’s action against  Kotak Mahindra Bank, asking it to stop onboarding new customers through its online and mobile banking channels will hit the bank's near-term growth, analysts said on Thursday.

And that is because Kotak Bank relies heavily  on online channels for new retail customer acquisition.

According to Motilal Oswal Financial Services, about 99 per cent of new credit cards sold and 95 per cent of new personal loans sold by volume were done digitally. As a result, the share of unsecured loans increased to 11.6 per cent in Q3FY24.

In a circular, the regulator said the action was necessary as "the bank failed to plug gaps in its information technology (IT) systems". 

"There were frequent outages in the bank's core banking system and online channels in the last two years which inconvenienced the customers," the central bank said. 

The bank, however, can continue to provide services to existing customers, including credit card customers.

The one word to note here is digital which is obviously a subset of technology.

Now, the specific technology applications would differ even within the bank, for instance, between credit cards and bank account opening and then of course managing the daily transaction pressure.

All banks worldwide however use technology to leverage efficiency for customer interaction and growth. These are two slightly different things.

Obviously internet banking has made our lives simpler.

As lives get simpler and the machine takes over the process, it is obvious that any business will use the  machine or technology to grow faster.

Think back to some years ago when sales agents would accost you outside airports, among other places to get you to sign on a form and get a credit card. Many credit card companies still solicit customers inside airports.

Acquiring customers digitally is a dream-like scenario for banks. It reduces friction considerably though am not sure it is cheaper because the cost of digital acquisition can be also high.

But you can scale at speeds not seen before.

And you need to do more of that if you are a listed bank in a competitive space, particularly in areas like credit cards.

By the way, when the front end is digital, you need large call centres to manage the obvious customer interactions that will follow, which banks have either set up or outsourced.

The FT reports quotes the TCS CEO envisioning a future where call centres receiving incoming calls become rare and replaced by proactive AI systems capable of predicting and addressing customer issues before they arise. 

He believes that chatbots equipped with generative AI will be designed to analyse customer transaction histories and perform tasks traditionally handled by call centre agents.  

While acknowledging that this transformation might take some time to materialise fully, Krithivasan expects significant progress within a year.

How he will sell this to his own staff, particularly, like I said, those who perform the  lower end BPO work is not clear to me but that is a different story.

TCS has apparently won more than 200 engagements in artificial intelligence (AI) so far this year. And the number of engagements going into production is also increasing," he said.

Now to return to banking.

It is quite evident that in many cases of RBI crackdowns, technology or the dependance on it has played a role in systems breakdown.

Let me give you a simple example. A core banking solution or the main technology solution of a bank which sits on a bank of servers can handle lets say 100 transactions a minute.

As the number of transactions grows, server or cloud space has to increase.

If the infrastructure does not keep pace, the system will slow down or fail.

Now this does not happen very frequently because we would know. But there is clearly a reliance on technology to get things done and faster.

Now, imagine a situation where, in the pursuit of efficiency and profits, banks go further and bring in AI on the front end to handle customer interactions or increase automation.

Some of this is happening already.

The mix is quite dangerous if you think about it.

Technology as we can see has increased efficiency but also the nature of frauds, including on peer to peer NPCI payment systems. 

As reliance on technology increases, KYC quality will weaken by definition.

Banks will then rely on AI to let's say filter faster so as to catch likely problem accounts either at inception or during transactions.

A few months ago, Axis Bank suspended my credit card because the system believed a dubious transaction had happened. None of the people I spoke to subsequently could show me which transaction was dubious and yet the system was convinced.

I had to wait for several weeks for a new card to arrive.

Another family member’s account was blocked by Standard Chartered because the system saw some apparent anomalies in the high number of Google Pay transactions. 

There was obviously nothing wrong or at least the bank could convincingly explain but the system summarily froze the account  and took several weeks to restore it and obviously multiple calls and visits to fix it.

So not only did the technology-led system freeze the accounts, but the humans seemed to have lost complete control, both in the case of the credit card and the bank account.

The reliance on technology is fraught with mishaps like this. In most cases you could be the victim. 

Remember one reason the RBI has cracked down on Kotak Bank because customers faced problems repeatedly.

There is no easy solution out of this one except to acknowledge that all efficiency comes at a price. 

And the price of efficiency will be an increasing number of breakdowns like this, some small, some large, some involving inconvenience, some sheer loss and many of them quite indiscriminate and senseless, as I found out recently.

Inheritance Tax, Can It Work In India And Indians?

Inheritance tax means that if you die, then your estate will be taxed by the Government as it passes on to your inheritors. So the inheritors receive less than what existed in the first place.

India had an inheritance tax. It was called estate duty, was introduced in 1953, and was abolished in 1985. 

India also had a wealth tax and a gift tax, which were abolished in 2015 and 1998 respectively.

The idea of an inheritance tax is obviously linked to wealth accumulation and the issue of more egalitarian distribution of wealth. 

The issue is understandably a very political one, though it should concern rich people mostly and not everyone as it seems to be the case since the thresholds are high.

Be that as it may, I reached out to TP Ostwal of TP Ostwal & Associates, a firm specialising in direct and international tax among others.

I began by asking him to define inheritance tax in a historical context before asking him about the practicality of such a tax today.

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It's Getting Tougher To Get Away With False Claims

Hindustan Unilever (HUL) has rebranded its category formerly known as "health food drinks" to "functional nutritional drinks" (FND) and removed the "health" label from Horlicks, in light of the recent regulatory changes in the health drinks category.

This change follows the directive from the Ministry of Commerce and Industry, which instructed e-commerce platforms to remove drinks and beverages from the "healthy drinks" category, according to a report in The Economic Times (ET). 

HUL said the shift to the functional nutrition label offers a clearer and more transparent representation of the category.

The problem is that there is no  precise definition for "health drinks" in the Food Safety and Standards Act 2006. 

The Food Safety and Standards Authority of India (FSSAI) recently asked e-commerce platforms to refrain from labelling dairy, cereal, or malt-based beverages as "health drinks" or "energy drinks", seeking to prevent consumer confusion and misleading advertising.

There are two kinds of issues, one is mis representing attributes and the other is to do with the content itself, as was the case with Nestle adding more sugar in infant food in India as compared to some other countries.

One key issue that has emerged, including in the light of the recent Supreme Court observations in the case of Patanjali who claimed a cure for Covid, is that there is far greater attention on claims made by brands and companies.

To what extent is this changing and how should brands also approach the new and increasingly enlightened consumer. I reached out to Manisha Kapoor, CEO of the Advertising Standards Council of India and began by asking her about the Horlicks example.