The Tariff Overhang Continues
India is now under a 50% tariff for exports into the US, only similar to Brazil
On Episode 677 of The Core Report, financial journalist Govindraj Ethiraj talks to Nikhil Varma, Technical Lead, India at Algorand.
SHOW NOTES
(00:00) The Take
(04:12) The tariff overhang continues but markets have forgotten them
(09:05) How real world enterprises are building on blockchain
(18:21) The rains are leaving early
NOTE: This transcript contains the host's monologue and includes interview transcripts by a machine. Human eyes have gone through the script but there might still be errors in some of the text, so please refer to the audio in case you need to clarify any part. If you want to get in touch regarding any feedback, you can drop us a message on [email protected].
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Good morning, it's Monday, the 15th of September, and this is Govindraj Ethiraj broadcasting and streaming weekdays from Mumbai, India's financial capital.
The Take: What If That Consumption Boom Does Not Happen?
A wave of tax cuts on daily use products and discretionary items like cars, air conditioners, and refrigerators, among others, will take effect in a week. The prevailing expectation, including in the stock markets, is that this will trigger a major consumption boom.
But what if it does not? Certainly, consumers prefer lower prices. However, their willingness to buy more or upgrade their purchases depends on a host of other factors that are not being discussed as much. The mixed reception to these cuts was summed up, perhaps, by former finance minister, P. J. Dambaram, in a recent column in the Indian Express.
He asked, if a 5% GST on toothpaste, hair oil, butter, infant napkins, pencils, notebooks, tractors, sprinklers is good today, why was it bad for the last eight years? Why did people have to pay exorbitant taxes for eight years? Of course, we cannot know whether the opposition would have reduced rates had they been in power. But the core issue is not high prices, it's constrained household incomes. Before discussing incomes, let's break down purchases.
High-priced items are often bought with loans and equated monthly instalments, or EMIs. An aspirational purchase like a car may happen, regardless of whether the price is X or X minus 1.5 lakh rupees, which seems to be the median reduction for most cars, particularly in the plus 10 lakh range. Equally, it's unlikely that someone will buy more soap or toothpaste just because the price is slightly lower.
What may happen is that consumers might trade up to premium brands within these categories. A Kantar World Panel report, serving over 6,000 households, said that expenditure had climbed steadily for the past three years. Urban spends rose from 52,700 rupees to 73,000, while rural spends increased from 36,000 to 46,000 rupees.
And yet it said financial stress was evident. 38% of respondents said they were just about managing and 45% said, or rather admitted, that they were struggling, in a CNBC TV18 report. Former Nestle chief, Suresh Narayanan, told the core report that spending on food, rent, and education, that's non-discretionary items, has been rising.
Because of very high rentals and the real estate boom, the rental and education component has been increasing at the cost of other essential or discretionary expenditures, he told me. He remained hopeful that the GST reduction would help households balance their budgets. A recent Reuters poll out over the weekend said, home prices in India were expected to rise faster than forecast, driven by demand from wealthy buyers.
Meanwhile, a shrinking supply of affordable housing was forcing millions into increasingly expensive rentals. A Knight Frank report noted a deficit of about 10 million affordable homes, a gap that could triple in five years. A Collier's official told Reuters that strong macroeconomic numbers have not benefited those at the lower end of the pyramid, whose disposable incomes have stagnated.
And as more people are forced to rent, urban rents are forecast to rise five to 8% over the next year. So come back, will the rate cuts spur consumption? The answer is yes, but the extent is unclear. Most households are still juggling their budgets to see if those lower prices will generate meaningful savings.
And if so, whether those savings can be allocated to other pressing expenses. Consumption for a host of macro reasons should remain steady or even strong. But it doesn't seem at this point that it can trigger a boom.
We should also wait for data to clarify the impact of these announcements. Remember that there is a gap between the 15th of August, when the prime minister announced those rate cuts and the 23rd of September, which is next week when they will kick in. Auto dealers are reporting better than expected sales, but we will need to wait till the end of October.
That's after most of the festival season has passed to get a clear picture. In the meantime, we should of course hope for more price reductions, including in other essential costs like energy and fuel.
And that brings us to the top stories and themes.
The tariff overhang continues, but the markets seem to have forgotten them.
How real world enterprises are building on blockchain
And the rains are leaving early
Tariffs and Markets
Whichever way you think the tariff discussions are going in your attempt to make sense of them, what we do know is that India is under a 50% tariff for exports into the US, except in some categories, and that is only similar to Brazil. Now the US government has called on G7 and European Union allies to impose meaningful tariffs on goods from China and India to pressure them to halt their purchases of Russian oil. The G7 finance ministers also discussed on Friday further sanctions on Russia and possible tariffs on countries that they consider enabling its war in Ukraine.
Now, all of this is not affecting the markets right now, at least it has not so far, with the markets now at a higher level than they were before the 52% tariff set. Meanwhile, on Friday, the indices were positive. Once again, the Sensex was up 355 points to close at 81,904.
The Nifty 50 was up 108 points to close at 25,114. The Nifty Mid-Cap and Nifty Small-Cap 100s ended with gains of 0.3 and 0.6% each. Away from the markets, inflation is up, though slightly.
Crisil Rating says the reason for the rise is food's exit from deflation and an uptick in core inflation, all of which has pulled up the consumer price index based inflation or CPI based inflation to 2.07% in August. Food inflation, Crisil says, has started to move up from very low levels with a statistical low base coming into play as well, but it still trails the headline, according to DK Joshi, Chief Economist at Crisil. Oil and fats inflation guided by global prices is also on the rise, coming in at 21%.
Core inflation also arose because of, guess what, rising gold prices. Now, Crisil is saying that it's revised its inflation forecast down from 3.5 to 3.2% for this fiscal. It also reminded us that excess rainfall and flooding in Punjab, Rajasthan, and Telangana in August do pose a risk to Kharif crop production and could increase horticultural crop prices.
And the markets were, of course, up for a second week. Just to come back to India, the blue-chip indices were up thanks to a couple of reasons, including renewed expectations of a Federal Reserve rate cut. That's this week.
And the indices were also up, of course, because of those goods and services tax rate cuts and increased consumption or expectations of increased consumption. IT stocks did well last week and gained about 4.3% in their best week in about four months, according to Reuters. And the other factor that helped was a large share buyback plan by Infosys, which is also India's second largest IT company.
The Federal Reserve is expected to cut rates by 25 basis points at its September 16th to 17th meeting, and investors are also expecting two more rate cuts later in the year. Apart from IT, auto shares were up, also, obviously, thanks to those tax cuts. Several automakers have already passed on the tax benefits to customers, and many of them thanked the government and the Prime Minister for the tax cuts in half-page advertisements in leading newspapers.
Meanwhile, the Securities and Exchange Board of India has made it easier for large private companies to go public. There are a few of them which are on the horizon that include Reliance Jio. Companies with market capitalisation of more than 5 trillion rupees, or $56 billion, can now come out with an IPO as low as 150 billion rupees and dilute 2.5% stake, the Securities and Exchange Board of India said on Friday.
Such companies will be allowed five years to raise the minimum public shareholding to 15% and 25% in the next five years. Till now, IPO-bound large companies were required to dilute a minimum 5% of their equity and have 10% of their public shareholding within two years of getting listed. So this will obviously allow the few large private companies that are on the IPO horizon.
One is Reliance Jio Infocom and National Stock Exchange, which will both be able to offer a much smaller stake in their IPOs next year, according to Bloomberg. Next week is a decisive one on Wall Street. This is because, as we've already said, the Federal Reserve is meeting to cut interest rates in the anticipation of which the markets, of course, have been running away.
Though I'm sure the markets will find some excuse for running up, even if for some reason the rate cuts don't happen. The NASDAQ composite notched a perfect week of closing highs on Friday, as investors took signs of weakening jobs and tame inflation to conclude that the Federal Reserve will lower interest rates next week, according to CNBC. The blue-chip Dow Jones Industrial Average was down, but having each close at record levels Thursday, with the Dow finishing above 46,000, the three major averages rounded out the weekly period with gains, according to CNBC.
Building on Blockchain
We continue with our Building on Blockchain series and dive into some specific real-world examples. This week, I spoke to Dr. Nikhil Verma, Associate Professor of Management at Ramapur College of New Jersey, and a technical lead in India with blockchain company Algorand Foundation. And I also began by asking him to do a quick refresher on what India's new personal data protection rules mean to enterprises large and small, before focussing on some case studies and data provenance and traceability.
INTERVIEW TRANSCRIPT
Nikhil Varma: Maybe I'll just briefly talk about the DPDPA Act. What I feel is that this is not just a regulation. It is actually a mirror which shows that our system is broken.
In this digital stone age where we are living, where artificial intelligence is able to write poetry and do all kinds of interesting things, we're still living in an era where we are still sharing Excel files, sending messages through WhatsApp. And that creates a lot of problems. I think that's what the DPDPA Act is addressing in many ways, where it is making sure that, you know, it is demanding provenance.
It wants to know where the data is coming from. You have to have a full traceability of data. And there has to be a granular consent.
It's not an overarching consent. From a Web2 perspective, the traditional system design perspective, I think that these are things that would be a problem for them to be able to support in a Web2-based system. And from a blockchain-based approach, I see that there are a lot of resolutions to these problems that we could address.
Coming to the one problem of the human cost, because we don't have provenance. So imagine a daily wage worker who is working hard to make ends meet, who is working and has some kind of a data track, but there is no provenance in their data as of now in a Web2-based system. And because of no provenance, they have no access to capital.
You had spoken to Chetna Gala Sinha previously from Mandeshi, and this is one of the implementations using a blockchain-based system where we are putting in a trust token, which I spoke last time, into the whole ecosystem along with the DigiLocker and Aadhaar integration to be able to bring in provenance and data.
Govindraj Ethiraj: Tell us how that works, Nikhil, on ground.
Nikhil Varma: So essentially, what was happening is that we used to have a paper trail of records, which was very difficult to validate and verify. When these women would go to a bank to be able to get a loan, and Mandeshi would give them a revolving line of credit, it was very difficult for Mandeshi to prove that these people are genuine, and it was very difficult anyways for these women to stand up. So essentially, there were high rates of rejection for loans, or the loans were delayed.
It would take them six to 12 months to be able to have access to capital. And as we know, access to capital is the key to be able to move up the ladder. Now with data provenance, okay, with the DPDPA, of course, that is demanding it, right?
Where is the data coming from? What we are doing is that we are making sure that each of these data points are now secured in the DigiLocker, but signed by Mandeshi, hence it is kind of anchored in the blockchain. So just to give you an example, Mandeshi actually has a line of credit that they offer to people in the non-organised sector.
But this revolving line of credit is all recorded, and was all recorded in an Excel sheet in the past. Now, we are able to validate and verify and record it in the blockchain with a trusted token that this person can share directly with the financial institutions. And we have data points now that the access to capital has been made easier for these people, because now they're able to demonstrate the provenance with a digital footprint.
Govindraj Ethiraj: Sadanand Right. The example, obviously, makes things easier to understand. Now, how do these borrowers actually share that data with a potential lender?
Nikhil Varma: Deepak The sharing process, again, has to follow a DPDPA model, right? I'll just quickly go to this whole idea of consent. In the past, they would actually send in a digital file.
You know, in most of the cases in India, we see that people send out information on WhatsApp. Now, what they are going to do is they are going to send these lenders a token, a consent token, which will give them access to their data. But prior to that, these lenders have the ability to look at the credit scorecard that Mandeshi has formed.
So, Mandeshi essentially has done something which is very interesting. Using all these different data points, they're building a credit scorecard. And that credit scorecard, it is published in the public blockchain, but it still has the privacy protected for the person.
So, essentially, you know, suppose I'm just going to colour code it. Suppose I am green. Yeah.
So, somebody who has the green token will have access to capital to a certain range. On the other hand, somebody who has orange would have something and somebody who has red would not have access. Yeah.
So, imagine that we have colour coded the credit scorecard and these tokens are sent to the financial lending institutions. These financial lending institutions now are able to shortlist people and then be able to send them, hey, I'm able to give you or you're possibly qualifying for a loan. And that is a token which comes from these financial institutions.
The woman can then accept that token. And once she accepts that token, her data is sent as a consent one-time view only to the financial institutions, which is basically a key to her digilocker. Basically, she's sharing all the information that is stored in digilocker.
Govindraj Ethiraj: Right. So, it seems interesting that the application for blockchain, at least the way you've outlined it, is perhaps the most utility driven at the lower end of the economic strata than what otherwise one would have thought.
Nikhil Varma: True. But this is not only at the lower end of the economic strata. This is a compliance nightmare for organisations.
Right. I mean, when you actually file for a loan, you don't know where all your documents are going. The financial institutions have no control over the documents.
Right. And that is a compliance nightmare that is going to come in. Because if you ask the organisation who all saw the document, they would not be able to answer that in affirmative.
With blockchain, what's going to happen is you are going to, of course, have the provenance of data, which is very important. This can be to all sectors of the society. You are able to make sure that you have full traceability of how the data is flowing and you are able to manage that granular consent.
So, I think, yes, I'm giving you an example of Mandeshi, which definitely is very relevant to one sector of the society, but this is relevant to anyone, in my opinion.
Govindraj Ethiraj: Right. And so what would be another different sort of example, not in opposition, but let's say it's different in flavour and texture from the one we've just talked about?
Nikhil Varma: So, one of the things that we are looking at is the KYC process. And KYC process is done in various shapes and sizes in India, depending on the kind of risks that a financial institution ascertains or determines on a person. And also, what is the kind of credit appetite of the person?
So, the person has a small loan, there will be a smaller KYC, but then the person goes in and asks for a bigger loan, then there will be more KYC and, you know, what is the frequency of the KYC and so on and so forth. This is a very complex process. And we've seen in the past that, you know, for the same asset that a person has, they are able to take loans in five different places, right?
With blockchain, it will be much easier for us to be able to track an asset, to be able to lock an asset, to be able to monitor the processes, to be able to make sure all these operational complexities are codified and are not prone to human error. And in fact, these things can be published in something which we call a smart contract, which codifies the business processes and can be part of the digital public infrastructure. So, every single organisation which is building best practices or a practice which is compliant to the TPDB Act can be the torchbearer for this.
And this would be something which would be followed all across organisations that could become a standard. So, best practice becomes a standard here.
Govindraj Ethiraj: Hey, that's a wonderful example to end on, Nikhil. We'll, of course, continue this conversation on blockchain and its application and how enterprises are using it or can use it to change the way they do business and interact with their consumers. Thank you.
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And look out for insights on blockchain and how it can transform businesses as we count down to the third Algorand India Summit 2025 to be held on December 6th and 7th at the ITC Gardenia in Bangalore.
A Weather Report
The Indian Meteorological Department on Sunday said the withdrawal of the southwest monsoon has begun from parts of western Rajasthan on September 14th, three days ahead of its schedule.
It's expected to remain dry in parts of western Rajasthan. Now, according to the weather department, the southwest monsoon has withdrawn with the fulfilment of the following criteria, development of an anti-cyclonic circulation over west Rajasthan, no rainfall over the region in the last consecutive five days and reducing in moisture content of the atmosphere over the region up to middle troposphere. On the other hand, training resumed in Mumbai.
So, have a great week ahead.
