My Angle on the Union Budget 2019

I would rate the budget presented by FM Piyush Goyal, a solid 4 out of 5. The budget managed to do the difficult dance between fiscal prudence and a sustainable, stable but progressive tax policy. More importantly, it provided security to two of the weakest links in India’s growth story i.e. the unorganised work force and the marginal farmers.

It is a common gripe amongst taxpayers that they do not get the benefits of paying taxes which they pay honestly (or otherwise) but various data sources suggest that we have one of the lowest tax revenues to GDP ratios in the world at ~11%. Compare that to Mexico who at 16% was the lowest amongst the OECD countries and most of these countries in this list are developed economies unlike India, where even the most basic infrastructure is being developed. The developing and growing economy is being supported by 6.8 crore taxpayers paying 120+ crores, which is dismal. Until we get to 30% tax revenues to GDP, we as tax payers will continue to bear this burden.

Unlike previous governments, I am happy with the way this governemnt has invested and spent my tax rupees and the change it has brought is visible. In the last 12 months, I visited at least 15 cities that can be classified as Tier 2 or beyond and I travelled to these places by planes, trains and automobiles. I have witnessed the benefits that these infrastructure investments have brought for the people who live in Bharat. Some of the areas that have seen the biggest ROIs are:

  • Connecting North East India with the rest of the country via rail & highways
  • The massive highway construction program
  • Upgrading the intra-city railway network, cleaner and better-equipped railway stations
  • Faster, more efficient and punctual intra-city railway services
  • Sanitation, electricity and home construction coverages

No money has been spent mindlessly. Almost all major urban centres are set to have intercity metro services, the defence spending has improved our security infrastructure and we now have a space programme that will put an Indian in space, with technology that will be developed within the country. These are all developments that I, as a taxpayer, am extremely proud and shall continue to support, with my tax rupees.

In the same vein, the Rs. 6,000 rupee direct cash transfer to farmers should be looked at as the start of an experiment that has its roots in the immortal words of late Rajiv Gandhi who had inferred that only 15% of the money given for welfare of the poorest and weakest sections of society actually received those benefits. This statement was made in 1985 and since then, the situation has barely gotten better.  In fact, the elected representatives have looted everything from seeds, urea and fertilisers that were meant for farmers. So a direct deposit of Rs. 6,000 would actually be equal to Rs. 40,000 benefit that the government would’ve had to dole out in order to achieve the same outcome. The only people that are making the most hue and cry about this are those that have made a living on such ill-gotten gains. However, this time the money will not be fattening the pockets of middlemen who have stolen my tax rupees. Instead, this will be the beginning of the process of plugging the gap. I am supportive of the initiative because the direct benefit transfer has saved us over Rs 90,000 crores according to UIDAI as well as the ancillary gains of the accurate welfare amounts reaching the intended recipients have been significant. Therefore, with this direct income support, it will be yet another nail in the coffin of the middlemen.

My only real grouch with the budget was the lack of support to the VC ecosystem, especially the VC funds. Other than the Rs.10,000 Crore fund of fund allotment (which is extremely difficult and complicated to avail) there hasn’t been any incentive for investors to put money into VCFs. Investing in VC funds is a new phenomenon for most investors, therefore, a tax incentive like offsetting tax on capital gains from real estate or listed securities by investing into SEBI registered VCFs would have provided a boost for investors. Secondly, reducing the tax on gains from VC funds to those from listed equity funds or even lower would have been a positive move.

However, in the end, the government did it’s best to support the ones that needed it most and modestly rewarded those who have contributed to the nation. There was a clear message that the government will encourage consumption but in a way that it directly benefits the targeted beneficiaries. I (as a taxpayer) am extremely satisfied and hope that the successive governments learn and follow the same path.

Lobbying for lower taxes can wait.

20/2019

Predicting 2019

Brad Feld, Fred Wilson and BillGates’ new year blogs inspired me to write this post today.

To the cosmos this is just another day but to humans this is that time of the year where they expend a tremendous amount of energy in planning, changing and predicting how the next 365 days are going to be. I did not see the value of this futile exercise until last year when I put my goals down on paper and then announced them on my blog and all my social media handles. I know for a fact that I have missed out on achieving several goals that I had set out for, but the ones I did achieve had a different sense of achievement.

While I introspect on the reasons behind the misses, one of the serious flaws in my goal setting was the lack of thought in predicting the status of the economy and events in 2018 and how they would affect my goals. For example, if I would have predicted that there would be a slowdown in venture funding due to the collapse of the angel investment ecosystem, I would have known that achieving 10 new investments for AVF would amount to nothing but a pipedream. Not foreseeing that set me off by 80% on that goal. Therefore, this year it made better sense to put down my predictions first and then plan my goals with those predictions in mind. So here goes:

I believe that 2019 will be a fantastic year for India, (that is) if India continues to enjoy a single party majority after the May 2019 assembly polls. I would prefer a strong leader like Narendra Modi to continue to lead the country instead of a council of ministers with their own agendas clouding the judgement of the prime minister.

The chances of Modi’s return are high as there are strong signals that the economy has gained momentum and is continuing to grow much better than what was expected post-GST implementation. Banks have seen better recovery from NPAs than what was predicted and with stronger balance sheets they will be out lending once again. There is also a good chance that the RBI will reduce interest rates due to lower than expected inflation on the collapse of crude prices. These events could flood the market with liquidity which is an ideal scenario for the incumbent party before an election because it improves the views about the incumbent in a short-lived public memory. With all this in mind, I believe that Indian GDP should grow at 8% in 2019.

The uncertainty over global trade wars have reduced significantly, and a buoyant Indian economy would lead to a record year for the stock market indices. I believe that this would percolate to the start-up ecosystem through an increase in M&A activity and many Indian corporates would setup CVCs to keep up with innovation and justify their high valuations. I believe that the government will bring in clarity to the use of Aadhar verification which will help to revive Fintech activity and implement guidelines for bringing cryptos back to India. The guidelines may not be along the lines that crypto purists would appreciate, but it will be a significant step ahead in comparison to the current situation. This is also going be a pivotal year for the start-ups raising money as we will see a rise in the number of active funds looking for deals and that will quickly fill the vacuum created by the angel networks. The better-informed entrepreneurs will avoid the “large” & distributed format angel investment networks and instead choose to have closer relationships with their funding partners. Entrepreneurs will seek funding partners like professional investors like VC funds, super-angels and family offices and we should see in rounds that have a smaller number of “professional” investors but with a larger investment per investor, and this trend will continue. The loss of good investment opportunities to professional investors will drive out the marginal angel investors that make up the bulk of India’s angel networks. These marginal angels will also experience their first round of write-offs which many of them aren’t prepared for, so they’re going to leave in droves.

The serious angel investors will demand much better deal flow and portfolio services to continue to invest their capital, something that will be difficult for marginal angel networks to achieve since they have not built these capacities. I believe that the angel networks will start to shut down – marginal ones at first and the larger ones becoming marginal, eventually ceasing to exist in following years.

When it comes to the overall Artha portfolio I believe that LenDenClub, Coutloot, ChaiBreak, Fynd, Karza Technologies, BabyChakra and X-Prime to have a headline sort of a year which will firmly put them in “pole” positions in their respective spaces. If they do not convert this year of opportunity into something substantial, then I believe a golden opportunity would be lost, forever.

In terms of where I would like AVF to invest, I am excited about the prospects of e-Sports and its growing popularity across the globe and in India. I think it would be interesting to evaluate an esports company for investment as I believe that this format can generate massive scale in a country where the average age group will be below 30 for the next 10 years. 

Statistic: India: Average age of the population from 1950 to 2050 (median age in years) | Statista
Find more statistics at Statista

I would also like to see founders developing sustainable business models from the opportunities that the Ayushman Bharat health insurance scheme provides for rural healthcare. Healthcare has been a very small portion of Artha’s portfolio and this year could be a good time to increase our exposure in the space.

So, here are my predictions for 2019.

I wish you and your loved ones a very happy 2019!

1/2019

Making Sense of the UPA vs NDA Economic Growth Debate

A heated political debate has been brewing between two accomplished lawyers, namely the last two finance ministers of India, P Chidambaram and Arun Jaitley. The debate began on the backdrop of the data released by the National Statistical Commission which stated that the GDP growth rate under the UPA was higher than the current GDP growth under the NDA government 
Of the various arguments that have been put forth by different parties of the political spectrum, I  resonate most with the arguments put forth by ET’s Saubhik Chakrabarti in the article “UPA vs NDA: Why higher growth doesn’t matter when followed by policy delinquency“.  
I believe that a lot of economic numbers achieved by UPA were because of the stable platform handed over by the Atal Bihari Vajpayee Government and the steroid (read: debt) fuelled hyper-growth of the worlds’ economy. The mirage of the strong economic power-house created by the UPA between 2004 and 2010 was blown away by the huff & puff of a crumbling world economy.   
UPA entrusted PM Modi with a country that was in turmoil: banks saddled with massive NPAs, high inflation, policy paralysis, low growth numbers, tax terrorism that was driving away FDI, Government-run SEBs that were out of money, runaway spending on thoughtless welfare schemes and most dangerously a demoralised & disillusioned class of entrepreneurs that had been maltreated by the government. UPA’s policies & constant infighting stifled any hope of supporting growth and innovation.  
I find myself sympathising with the Modi-led government because it braved strong headwinds in the global economy, maintained fiscal prudence and smartly bailed out the banking, power and manufacturing sectors from the brink of collapse, to bring India to the position of the world’s fastest-growing major economy. 
I believe that my contradicting views of the two governments are best represented by the contradicting mindset that I woke up with in these two time periods. When I woke up under the watchful eyes of the UPA government, I constantly felt that the worst was yet to come, however when I woke up today to write this post at 4 am, I was certain that the best our economy has to offer – has just begun!  
66/2018