The entrepreneurship bug has spread in India, and a positive drive to encourage entrepreneurs resonates throughout society. The����reported��in 2014 that “58% of Indian adults (18-64 years old) consider entrepreneurship a desirable career choice; around 66% think that entrepreneurs receive a high level of status and respect.” It is worth noting that the National Association of Software and Services Companies (Nasscom)��sees��.

The startup ecosystem is also receiving help from the government. Prime Minister Narendra Modi announced the “Start up India, Stand up India” initiative��to��encourage��entrepreneurship amongst women as well as disadvantaged communities across the country.

In addition to more loans being provided, the other��, reducing red tape and setting up research parks. The recently passed bankruptcy code will enable a committee of creditors to decide in 180 days if a venture should be continued or liquidated. This will allow as quickly as possible. Another benefit, indicated in an article by��, is that hardworking entrepreneurs will not be tied��down��in failing ventures for a long time.

Coupled with increasing entrepreneurship is the rising number of local and foreign accelerators in India. This is��evidenced��by a that ranked Bangalore as the fastest growing venture capital (VC) and seed funding ecosystem. However, can be��difficult��because of the high operating expenses and the uncertainty about a startup’s ability to succeed.

While there is improvement in the startup ecosystem, much still has to be done. India still languishes with an ��ranking��of 130 out of 189 economies in 2016—an improvement of four places in the last year. The “starting a business” topic has improved by nine places, but it is still ranked at a low 155. Even with the new bankruptcy code, India has to ensure strict enforcement so the benefits can be accrued to those involved.

In this edition of , 51�Թ���talks to Raghav Kanoria, founder and partner of East India’s first structured private accelerator, , about accelerators and entrepreneurship in India.

Daniel Currie: The growing entrepreneurship zeal has spawned a number of��accelerators��and incubators in India. What drove you, Kumar Patodia and Chandradeep Mitra to form Neoleap Business Ventures?

Raghav �����Դǰ�����:��We noticed that there are only a few standalone private accelerators as most accelerators are part of large companies such as Microsoft, Intel and Google. The reason for this development is that these corporates have more cash to keep funding their accelerators. In addition, accelerators have a long payback period of two to three years. In Neoleap Business Ventures, we only take a joining fee and a commission on the fundraiser that a company may get on the demo day. The long-term value is dependent on the 3-5% sweat equity of the startup, which means that a lot of money has to be spent in the meantime by accelerators.

The rise in the number of accelerators comes from the success of Y-Combinator and Techstars. These standalone accelerators raised $500 million to $1 billion. Through Y-Combinator’s success with Airbnb and Dropbox, people have figured out that an accelerator only needs one or two big hits to make it financially sustainable. This is evident in India as VentureNursery incubated Oyo Rooms, and it returned around $9 million. GSF, another accelerator in Delhi, was able to sell Little Eye Labs to Facebook for around $10 million.

India is seeing this rising trend, which means there will be a lot of private accelerators coming up in the future.

Currie: Your website mentions that Neoleap Business Ventures is the first private accelerator in East India. Why was there a dearth in accelerators in the first place?

�����Դǰ�����:��It was a combination of different factors: There was not much funding and government support for startups. Now, the government and the Ministry of Small and Medium Enterprises are proactive.

While there was not much funding at one point, there is a change taking place. I co-founded Calcutta Angels Network, which has funded 14 companies in India. Nasscom has also opened a warehouse in Kolkata, and [it] started incubating startups over the past year. The Indian Institute of Management in Calcutta also has an incubator. All this has come together to build a funding platform in the last two to three years.

Currie: The Neoleap Business Ventures’ website specifies criteria��for startups to be accepted to your accelerator program. From that list, is there one characteristic that a startup must have, or is each point just as important as the others for a successful venture? What quality do entrepreneurs need in order to thrive in an accelerator, and how do you find out if they have these attributes?

�����Դǰ�����:��It is important for startups to have a good idea that is scalable and has a large target market. The startup must also have a good co-founding team that has the vision and drive to run with the idea.

Entrepreneurs should be adaptable and have the willingness to learn. These are key attributes because it means that entrepreneurs learn from mentors [and] investors as well as the classes. If people are willing to get through the application process—and they know the classes and programs provided—then they have understood what they will go through once accepted into this program.

Currie: What do entrepreneurs typically want from accelerators? What are the difficulties that entrepreneurs face at this nascent stage?

�����Դǰ�����:��They are looking for mentorship, workshops and a place to meet investors. At Neoleap Business Ventures, we provide an all-round holistic system of six workshops that are shared with other startups in the program: Amazon IT architecture, accounting, compliance, legal, financial modeling and social media. These are the tools that we think people need at this stage.

Currie: Neoleap Business Ventures has a four-month��accelerator program. What should a startup accomplish by the end of this time period?

�����Դǰ�����:��A startup needs to have a business plan and a finished financial model with a 24 to 36-month horizon. It should show that the startup’s idea or product has the potential to disrupt the market, which means that it should not be a “me-too” product—a copy of [an] existing or [a] competitor’s product line or business model. Even a small company should look to disrupt a niche market. If it is a social impact idea, then it should have a wide impact at the bottom of the pyramid.

While there is improvement in the startup ecosystem, much still has to be done. India still languishes with an Ease of Doing Business��ranking��of 130 out of 189 economies in 2016

The startup should also have a strong co-founding team in place by the end of the program. This provides a good sounding board and allows for complimentary skills to be utilized for the betterment of the startup. Entrepreneurs should also incorporate feedback they will get throughout the program from corporate partners. These partners give advice to various startups on their business [or] product, as well as giving insight on how companies decide if they want to acquire or buy a stake in the startup. This business feedback is important for the startup.

Currie: What happens when a startup in your program does not get investment on the demo day?

�����Դǰ�����:��No one can guarantee anything because it is all on a best effort basis. The whole system that we have created, which brings in mentors, workshops and constant feedback within a four-month period, should help the startup to raise money. If you are unable to raise money, then there is something wrong with the product.

Our intensive application system for the program ensures that the selected companies will have the attributes to do well. From the 50 startups that apply, only four or five are selected.

Currie: How do you see accelerators evolving in the future? Are they going to be more sector-specific?

�����Դǰ�����:��In the US, the startup ecosystem began around 45 years ago, and the big accelerators became successful in the last seven to eight years. Initially in the US, there were just angel investors, high net-worth individuals, family offices and VC funds. It takes about 20 years for market depth to be created and accelerators to come in.

In India, all this began in 2000. In another two to three years, the market will become mature, and you will start getting sector-specific accelerators.

Currie: What are the differences between startups in eastern India in comparison to the rest of the country? For example, do you see a large number of startups in one or two sectors or does it vary?��Are there any opportunities for the future?

�����Դǰ�����:��In East India, a lot of the startups are associated with education, health care, food, fashion, construction-related, data analytics, tea and real-estate. In the future, a lot will come out in artificial intelligence, fintech and big data. For the time being, startups in these sectors are not prevalent in India.

Currie: What should the government do to help improve the level of entrepreneurship in the country? Also, what should the government do to help accelerators, incubators and venture capitalists achieve this goal?

�����Դǰ�����:��Firstly, there needs to be good infrastructure such as better roads and power generation. This has been improving over time as a lot of government and private financing institutions have been providing capital to this sector. Execution of such projects has improved as well.

Funding and grants should be provided for qualified accelerators. The founders should be credible people who fulfil specific criteria to get grants from the Indian government. Such criteria could include the track record of the founders, investment in startups, [the] number of successful exits, and if the founders are in touch with the community of startups and lawyers. These criteria can be quantified in some way.

Other important points include research from government institutes such as IIMs [Indian Institute of Management] and the Indian Institute of Technology to help benefit entrepreneurs and accelerators; a platform for seminars and events; and visibility of entrepreneurs and accelerators in publications. Tax benefits to startups in accelerators should also be a priority.

Currie: Will the recently passed Goods and Services Tax (GST) bill and the new bankruptcy code help entrepreneurs?

�����Դǰ�����:��I think the bankruptcy code will help the startup ecosystem, because if the company does not perform then it does not mean that the individual is liable because everything is on [a] best effort basis.

The GST should not affect the startup ecosystem. There might be some impact on e-commerce, but I do not think it will make a difference for education and technology startups.

Currie: We know that Mumbai, Bangalore and Delhi are places for entrepreneurship. Do you see Kolkata becoming an entrepreneurial hub in the future?

�����Դǰ�����:��Kolkata has a lot of ingredients to become an entrepreneurial hub, and it has all been developing over the past two to three years. We have an angel investor’s network, a group of engineering and management institutes, a large corporate market [and] a proactive government, along with incubators such as Nasscom. There is no reason why we cannot make Kolkata a hub for entrepreneurship in eastern India.

Currie: What advice would you give for enthusiastic and budding entrepreneurs in India?

�����Դǰ�����:��The main advice is to keep going. Entrepreneurship is a long and hard journey. It is only for the committed people who can face challenges and adversity, and overcome it all from time to time.

The views expressed in this article are the author’s own and do not necessarily reflect 51�Թ�’s editorial policy.

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As many sporting fans await the start of the Olympics, it is hardly an understatement that the host country, Brazil, faces a number of economic and political challenges. Some of the many problems include an ailing economy and an uncertain political situation. Other countries have also seen their share of problems leading up to the Olympics, from the Russian team’s doping����to Pakistan’s dire state of its sporting��. Yet, as Brazil lurches from one����to another, it remains to be seen if the Olympics will help the country overcome its problems.

notes that Brazil enjoyed a period of economic��growth��of 2.2% year-on-year average from 2011 to 2014. Between 2002-2008, the country experienced an average GDP year-on-year growth rate of 3.5%. The article also noted that Brazil’s unemployment rate even dipped below 5% for most of 2014. This was reflected by the National Index of Consumer Expectation as the statistic��remained��above 100 from 2008 until early 2015—a number above 100 indicates increasing confidence. According to , the consumer expectation measure “focuses on consumer’s current financial situation and on expectations about inflation, unemployment, wages and major purchases for the next 6 months.”

Economic and Political Malaise

These statistics seem to paint a rosy picture. However, Brazil has faced a number of severe problems that have compounded over the past five years. The fall in the commodity markets is��especially painful for Brazil, considering that its commodity exports����more than 50% of total exports. From 2000 to 2013, China’s annual����with Brazil grew from $2 billion to $83 billion. Yet, as China grapples with its economic restructuring, Brazil suffered as commodity prices saw a sharp downturn.

These external problems were furthered by what John Lyons and Paul Kiernan of The New York Times �󲹱�������as the “resource curse.” Countries with abundant resources will benefit from great booms, but will inevitably fall into a trap of economic mismanagement and overvalued currencies.��The ��supports��this, noting��that Brazil has structural weaknesses ranging from poor infrastructure to a considerable informal sector. Such structural problems inevitably weigh on the economy, with the ��by 3.8% in 2015.����has now reached 8.84% in June year-on-year—considerably higher than the government-set target of 4.5%. The high inflation has forced the Central Bank to keep its����interest rates of 14.25%.

The Transparency International corruption perception index allocates a score of 100 to a “clean” country, while zero indicates the most corrupt. From 2014 to 2015, Brazil saw its score��fall��from 43 to 38.

With all these problems, Brazil’s credit rating has been reduced to junk����by Moody’s Investors Service, S&P and Fitch. With growing government debt and increasing interest payments, Brazil’s interim president, Michel Temer, will look to����government spending.

As Brazil tries to put its economy together, the country still faces political difficulties. High-profile����clean-ups have implicated the oil giant, Petrobas, and several politicians. Suspended President Dilma Rousseff is currently undergoing an ���ڴǰ�����the budget in her favor. The Transparency International corruption perception index allocates a score of 100 to a “clean” country, while zero indicates the most corrupt. From 2014 to 2015, Brazil saw its score����from 43 to 38.

Olympic Promise

With Brazil’s economy reeling, it is a wonder if the Olympics will be the boon that the country needs. Other than the sporting marvel that will come to Rio de Janeiro, the host city, there are some economic benefits. Around 350,000 tourists are����to come and view both the Olympics and Paralympics, which means that there will be an increase in consumer spending. With an uptick in consumption of goods and services, this could translate to increased employment to serve the swell in tourism.

Kevin Daly, from Goldman Sachs,����about the London��2012 Olympics that there are longer-term benefits “such as the promotion of London and the UK as a tourist venues and as a potential location for investment.” Within the same report, Daly also mentioned that London may not accrue as many longer-term promotional benefits from its time hosting the Olympics because it is already known for tourism. The same could be said for��.

The city could also benefit from increased investment that may not only boost the infrastructure for sporting events, but to also improve transportation and other venues. Indeed, Moody’s has����that there will be benefits from the $7.1 billion investment in the city’s infrastructure such as metro advances.

Investments such as these could be utilized in the future—lest they become “white elephants”—as Goldman Sachs economists Yu Song and Michael Buchanan stated in a����on the Beijing Olympics that “more than 90% of the total investment for the games was in telecommunications, transportation and utilities … and most of this has been fully utilized since.” The positives from increased investments in Rio have also brought forth controversies through ��and the fact that the has already been��exceeded��by 51%.

Yet, there are other factors that cannot be measured—from the promotion of the host country’s culture to the pride that comes from hosting the Olympics—as suggested by sports scientist��. Daly, Song and Buchanan mention other benefits of promoting sport as well as healthy lifestyles and even increased environmental awareness—the final point specifically benefited Beijing.

Tim Toohey, researcher from Goldman Sachs,����that “defining feature of whether the London Games provides a better economic return than the Sydney Games could well be the high degree of slack in the UK economy.”����refers to the amount of resources, which includes labor and capital that are currently unemployed. Brazil does face an unemployment����of 11.2%. While labor and capital can be employed to help during the Olympics—whether it would be transitional use or not—the structural problems still remain.

In order for Brazil to benefit from the Olympic potential, it will have to rein in corruption and get rid of the uncertainty in the political system. It should also reduce its dependency on commodity exports so as to not be susceptible to adverse changes in prices.��With so much uncertainty in the economic and political realms, it may be best to simply enjoy the sporting marvel that the Olympics promises to be.

The views expressed in this article are the author’s own and do not necessarily reflect 51�Թ�’s editorial policy.

Photo Credit:��

We bring you perspectives from around the world. Help us to inform and educate. �۴dzܰ�����is tax-deductible. Join over 400 people to become a donor or you could choose to be a��.

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India is well-known for its inefficient legal system with archaic laws that hobble its economy. While the country is trying to forge ahead by increasing its investment in infrastructure and curbing money laundering, far too many of its colonial-era laws do not make any sense.

While Prime Minister Narendra Modi has been started repealing out-of-date laws, he will need up the ante to keep his promise to . Reforming a glacial-paced judicial system, along with improving enforcement of existing laws will , which is now a faint notion instead of daily reality. India needs new legislation that is drafted clearly and rigorously.

Although foreign investment has been flowing��into India recently, more reforms will increase this inflow enormously at a time when much of the world is in economic turmoil. The current government has tried to push through new legislation to attract foreign investment.

Yet��protests have erupted against the Goods and Services Tax bill (GST) and the Land Acquisition Bill. The Indian National Congress, the ruling party for many decades, has taken a populist position and is opposing Modi even on the policies it once proposed. All eyes are on Modi to see if he will have the will to push through the legal reforms that India desperately needs to give its economy a fillip. If the prime minister fails to push through these legal reforms, his standing will��suffer a blow.

Another mammoth task lying in wait for Modi, as per a , is educational reform. Indians on an average get only seven years of schooling. The same report goes on to point out that India “has the highest illiteracy rate–33%–in the world.” Changing this requires will, reforms and resources. A mix of a scientific education based on experiments and a liberal arts ��modeled��on critical thinking is what India needs today.

In this special edition of , 51�Թ���talks to��Atul Singh, the founder, chief executive officer and editor-in-chief of the organization, about the state of the Indian economy and the reforms it needs.

Daniel Currie: India is a land of obsolete and old laws. Why do laws from the 1800s continue to dictate life to this day? Which laws need to��be repealed to benefit the country both economically and socially?

Atul Singh: The question “why” has a simple answer. India has long been an exceedingly conservative and cowardly country; add to that the continuing hangover of the British colonization. Anyone who speaks English in the proper accent is deemed to be intelligent and educated, while anyone who speaks the vernacular is considered a country bumpkin. This is the Indian mindset.

Surprisingly, there is still veneration for the legacy of the empire, even though it reduced the Indian economy from 24% to 2% of the world GDP [gross domestic product]. This colonization of the mind ensures that Indians continue with the system the British bequeathed them even when it is clear that it no longer works.

Indians pride themselves on being practical. This is often code for accepting the status quo. So, there is little questioning about the roots of the Indian system, even less discourse on changing laws that do not work and hardly any vision for new laws or systems that India needs to become a modern nation. The lack of cultural confidence and bravery permeates all aspects of society.

However, I am hopeful things will change once a new generation comes of age and demands more rights and better services. This will happen in the next 50 years. In the near-term, I do not see much change.

The answer to which laws must go is simple too. Too many old laws on the books were signed into promulgation when India was still a part of the British Empire. A 1998 commissioned by the government itself recommended the repeal of over 1,300 outmoded laws. The country is still waiting with bated breath for its elected leaders to act on the recommendation of the report.

Specific examples of obsolete laws include the 1861 Police Act. Contemporary Indian society cannot use a law that was drafted four years after what the British called the Sepoy Mutiny of 1857. The Indian Penal Code of 1860 is ridiculously outdated, and it is frightening that no one talks about reforming it. This piece of legislation was drafted by none other than Lord Thomas Babington McCauley, a man who also created the Indian education system to train natives to be Englishmen in taste and serve the British Empire. Another vintage piece of legislation is the Indian Telegraph Act of 1885, which ridiculously governs satellite phones and radio today.

Truth be told, India needs a complete legal overhaul. Yet it is important that the new legislation is drafted thoughtfully and rigorously. Otherwise, the remedy will be worse than the disease.

An example of this is the crude piece of legislation called The Indian Companies Act 2013, which was passed by the previous Congress government. It is poorly drafted and even contradictory in places. The act adds to India’s infamous red tape. Starting a company is difficult and closing it even more so. The act creates barriers to entry and exit, stifling business activity. This is a shame because Indians are entrepreneurial by nature, and this ghastly legislation is shooting the country in both its knees.

Currie: India has struggled with the enforcement of laws and reforms. Why is it a problem to this day?

Singh: There are many reasons here. As I previously mentioned, there are plenty of crazy laws that no one in their right minds is going to obey. In fact, if all the laws were actually implemented, India would come to a standstill. Yet this means that rule of law suffers. If a country has terrible legislation, then a culture of disregarding laws develops.

Let’s assume for a moment that laws became less insane. Then, someone would need to impose those laws. Right now, there are hardly any institutions upholding rule of law. The police is understaffed and underpaid. It is little surprise that most policemen tend to be corrupt. The police in many ways are the biggest criminal gang in the country. There are no trained prosecutors or a prosecuting service. There are few regulatory agencies with teeth that can prosecute wrongdoers and penalize them.

Finally, the Indian judiciary is in shambles. In an effective democracy, decisions must be reached in a timely manner. Cases in India drag on for decades and decisions are reached at snail pace. Millions of cases are pending, and people end up going to bosses of criminal syndicates instead of courts because that is cheaper, quicker and more effective.

India needs to do the following if it wants any semblance of rule of law:

1) It must simplify and rationalize its outmoded and irrelevant laws.

2) It has to create an enforcement mechanism that works. This involves reforming the police as well as creating civil prosecuting agencies and regulatory authorities with teeth.

3) It has to take laws seriously and combat the pervasive culture of corruption.

4) It has to reform its judicial system as cases must be heard quickly and cheaply.

5) More transparency is essential. A very simple example would be the creation of an online national land registry system so that anyone can look up who owns the land along with its estimated market price.

6) Finally, recruit talented and skilled men and women into the government. Once they join, create a culture of competence at all levels.

Currie: What is the role of the private sector while the government is in the tumultuous phase of passing reforms?

Singh: The private sector has a pivotal role to play toward long-term reforms. Certain things will help everyone. A simple and transparent taxation regime would improve business climate by mitigating uncertainty and convoluted efforts at evasion. Better infrastructure would help everyone too.

Indian companies can often be very short-term. They cut corners, bribe and even intimidate. This might help them in the short-term, but it makes the business climate uncertain, hurting future potential. Indian companies have to realize that a reformed India would be in their interest as well. Otherwise, India’s demographic dividend will become a catastrophic curse. The environment in which these companies operate might become toxic and spill out into violence. So, being less selfish might actually help the private sector in more ways than one.

Currie: The National Democratic Alliance [NDA] government has struggled to pass bills such as the land and GST bill. What must be done for these bills to get passed as soon as possible?

Singh: There is a lot of drama in all realms of modern politics–even the US Congress is not immune to political spectacles. Each political party positions themselves as the one fighting for justice and against tyranny. The main problem with the NDA is that it does not have a majority in both houses of the parliament.

The NDA may be able to get the majority in the upper house of the parliament, but in the meantime, it will have to practice some quid pro quo to get the necessary votes. While the Congress Party is clearly trying to obstruct bills, the BJP [Bharatiya Janata Party] has been “playing politics” in the past as well. The BJP initially negotiated a nuclear deal with the US and then did a 180° to oppose it in parliament.

The BJP is new to power. It must find allies and spend more time to work on the legislative process. I am convinced the government is not focused enough on this process. Of course, it can try to keep winning elections and gain control of the upper house. Even then, it will have to spend time reading and drafting laws.

Now, let us look at bills. The GST is relatively straightforward, but the land bill is tricky as the latter can be used arbitrarily. If people are going to have their land taken away, then there better be a bona fide reason for it. So, safeguards along with accountability, transparency and a speedy judicial review are essential to ensure some sort of justice or at least prevent gross injustice.

The land acquisition bill is necessary for creating jobs in India. Hence, Modi and his team have to make a case for it. People have to be told that if they want better roads, then some of them will lose their land and houses in the process. The same holds true for any infrastructure project or even a defense one.

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Currie: What reforms can be passed to improve India’s shoddy “ease of doing business” ranking?

Singh: With colonial-era laws, rampant corruption and red tape, it is little surprise that India is a terrible place to do business. This year, India has dropped two places to 142 out of 189 countries in the “ease of doing business” ranking. The World Bank places India at 158 on “starting a business,” 184 on “dealing with construction permits,” 156 on “paying taxes,” and 186 on “enforcing contracts.”

I have already answered this question earlier. The six reforms I mention would go a long way to make India a better place for business. I would add one more suggestion. Let us get rid of the Indian Administrative Service [IAS] and Indian Police Service [IPS], and professionalize the civil services. It is a joke that the system created by Macaulay and Jowett survives. Let us get rid of generalists with little subject matter expertise and even less decision making ability. For instance, let us have people with experience in finance, an understanding of economics and familiarity with accounting sitting in the finance ministry instead of the bunch of jokers playing poker with India’s economy.

Currie: With the important Bihar elections coming up, there are many people complaining about the NDA’s pro-corporate stance. Is Modi pressured to pass more populist reforms to attain the votes in Bihar?

Singh: I would not like to use the term “pro-corporate.” Modi is under a lot of pressure to create jobs, and the expectations are sky-high. His bet is to try attract companies to “Make in India,” but foreign companies are scared of the retroactive taxation policies employed by President Pranab Mukherjee during his time as finance minister. The use of retroactive taxation is a spectacularly stupid idea, and Mukherjee can claim the credit for single-handedly deterring foreign investment into the country.

The government has to make it easier for small and medium enterprises to do business. India’s challenges are huge and there needs to be urgent reforms. Sadly, Modi has not been bold enough. His economic team is weak, and Arun Jaitley is proving to be a poor finance minister. The team around him is also a touch lightweight with a fixation for McKinsey-style presentations instead of hard headed major decisions.

For instance, Jaitley should get rid of Mukherjee’s idiotic retroactive tax law. Similarly, he could get rid of a number of outdated laws and regulations, many of which have been enumerated in numerous reports. The most terrible sections of the Companies Act of 2013 should be redrafted. As a lawyer, this is the least that Jaitley can do. But he has yet to even mention this issue. I have no choice but to give Jaitley a “C” grade for his performance as minister of finance. If Jaitley fails to outline a clear blueprint for the Indian economy, then all this talk about “Make in India” will��remain little more than hot air.

Currie: As per a PricewaterhouseCoopers report, The Winning Leap, India is struggling with a lack of skilled workers in numerous fields. What reforms do you propose to increase the supply of skilled workers?

Singh: This is a long-term play and the problem is a lack of education. Rajiv Pratap Rudy, the new minister for entrepreneurship, is concerned about the dearth of skilled workers in India’s economy. As Rudy rightly points out, only 2% of the Indian population can be characterized as skilled labor. For Germany that figure is over 80%.

India needs a complete overhaul of the education system created by Macaulay. That system served the British Empire well. It fails independent India and condemns hundreds of millions to lives of illiteracy and poverty. India’s primary, vocational and higher education system has to change. To answer this question in detail would a lot of time. So, let me make some quick points.

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Primary education has to be more relevant to the daily lives of India’s teeming millions. For instance, village schools could impart knowledge about local crops, cattle and weather patterns. Similarly, a stress on working with one’s hands has to be an essential part of school. The Germans have a great tradition of crafts and so did India in the pre-British era. A new stress on crafts and a renewed respect for it is essential. Making a chair, learning to work on a car engine and practicing plumbing skills have to replace the mindless rote learning Indians venerate.

Higher education suffers from the heavy hand of bureaucrats. Even directors of the elite Indian Institutes of Technology have to kowtow to ignorant IAS officers who have no experience of teaching, research and running any educational institution. They decide budgets, make top appointments and dictate priorities for the Indian education system.

Smriti Irani, the minister who is the big boss of India’s education system, is weak. The IAS officers who surround her are incompetent. Hence, there is no hope in hell for any meaningful reform of India’s dysfunctional education system.

The only saving grace for India is that the previous government was worse. The Right to Education Act passed by the Congress Party is a complete and unmitigated disaster. It imposes conditions on schools that they cannot fulfil. It gives government far too much control of curricula, which is utterly unacceptable. Irani must repeal this law immediately, but I doubt she has the wisdom or will to do so.

In the long-term, education will decide whether India succeeds in an increasingly competitive world. Besides, you simply cannot have an effective democracy with an uninformed and uneducated electorate. Macaulay’s system has to go. India has ancient examples such as Nalanda to look up to and modern inspirations such as Rabindranath Tagore’s Shantiniketan to draw from. It has a culture of learning and an intellectual tradition that goes back millennia. Even a few tweaks will unleash incredible energy in the country.

Currie: What are these tweaks or reforms that you would like to see?

Singh: First, give India’s higher education institutions autonomy. Get rid of the empire of patronage in which Macaulay’s illegitimate children or, in other words, IAS officers wield power without responsibility. Decentralize!

Second, ensure that private universities are not simply a means for the rich to launder their black money or grab land from the poor.

Third, do not copy the US blindly. Too many private universities seem to have the ills of the American education system with none of its redeeming qualities.

Fourth, spend more on education, especially primary and vocational education.

Fifth, establish some kind of apprentice system like the Germans. In fact, invite them to run some schools for mechanics, carpenters and plumbers. Goddammit, this is a country that once built the Sanchi Stupa and the Taj Mahal! Let us create a culture where students start working with their hands again. That is how we eventually create an economy where people take pride in creating things instead of just consuming stuff.

Currie:��Indian culture prizes those who learn and practice engineering, medicine and commerce, while it does not provide the same regard for subjects such as arts. Do you see this as a problem? Should this mentality change?

Singh: I think Indian culture might be starting to change. There are experiments taking place at the grassroots level that give me great hope for the future. The Agastya Foundation, which is led by Ramji Raghavan and supported by Desh Deshpande, is doing great work. They go around teaching science through experiments in villages. That is fantastic. There are many similar efforts going on.

Hopefully, such efforts at the grassroots will merge praxis and practice, and spur critical thinking. India has a history of speculative thinking and came up with the idea of the zero. Today, the country has to learn from the best principles in Finland, Germany, England and elsewhere.

You are right though that Indian culture is still fixated on engineering, medicine and commerce. Yet it is also true that most Indian engineers cannot fix a broken car or repair a door. Most Indian degrees are not worth the paper they are written on. Indians have to realize that skills are more important than certificates. It is better to be a competent electrician than being a useless engineer.

Yes, culture has to change. Indians have to realize that the education system they venerate is a fossil. Macaulay, the man who created it, declared that “a single shelf of a good European library was worth the whole native literature of India and Arabia.” This is bullshit. Yet Indians have internalized Macaulay.

What India needs is a reconnection with its own roots. It has to jettison Macaulay and learn from the best in the world. It has to rediscover the same spirit and desire that led Tagore to start his school in Santiniketan and Madhan Mohan Malaviya to create Banaras Hindu University.

Currie: India and China have made inroads to improve bilateral relations through the Asian Development Bank and other measures. What more can be done to strengthen ties with countries in the East?

Singh: A lot!

More business interactions between India and the countries of the East will foster better growth prospects. Greater interaction between students in India and China will create business opportunities and deepen networks.

At the moment, India’s diplomacy is handicapped. The Indian Foreign Service [IFS] officers, who represent India abroad, have to become more professional. Better recruiting and training would be a start. A higher number of diplomats would help. India’s diplomacy of 700 is the same size as Singapore and that is madness.

Promoting trade or an inability to do so is the Achilles heel for Indian diplomats. US diplomats work hard to expand American trade around the world. Britain, in particular, has a great tradition of promoting trade. After all, they fought the opium wars and got Hong Kong to promote trade. India has a bureaucracy that is still steeped in the Nehruvian tradition. India’s first prime minister was a Cambridge-trained socialist who cared about non-alignment and not trade. Non-alignment is now dead, but IFS officers still do not know how to promote the interests of Indian business.

The future of trade will be in Asia, and India can make a choice to be a big part of it. It can start with trading arrangements in the near neighborhood and expand to Southeast Asia. It has to give its educational institutions to establish relations across borders in the same way as Harvard University or INSEAD. It has to whip its diplomacy into shape.

Finally, Indian business leaders, entrepreneurs and diaspora have to be a part of the policy making apparatus so that fresh ideas and dynamism enters this cobweb-ridden Nehruvian bastion.

Currie: Lee Kuan Yew, the first prime minister of Singapore, eschewed some civil liberties in order to transition Singapore into the economic hub that it is today. Are there limits to the messy and chaotic democracy for India?

Singh: People have already voted for limits to the chaos by voting for Modi. He ran his campaign on the promise of growth. He marketed himself as the “development man.” I suspect Modi wants to be remembered as a Lee Kuan Yew figure for India, and he does centralize power.

Of course, there are limits to the chaotic caste-based coalition politics. People are trying to find some kind of strong leadership, which will allow Indians to feel more proud at a global level. Many Indians travel. They visit other parts of the world. They are starting to wonder why other countries can have clean roads. After visiting countries like Australia and Singapore, many ask themselves why India should lag behind.

Finally, I want to address this false dichotomy between democracy and growth. India’s problem is not democracy, but corruption, which in turn is largely because its structures are colonial. The point is Indians do want limits to messy chaos, but they still want democracy and liberty.

Currie: Modi has completed his first year as prime minister. What is the one good and bad point about his time at the helm?

Singh: I think Modi has been pretty decent at foreign policy. He has been bold in many ways. He has taken some big decisions and raised the profile of the country. People in the highest echelons of business, law and politics are taken in by Modi’s charisma. The international community is looking to India with expectation, and Modi deserves credit for raising India’s profile.

I am extremely disappointed by Modi’s timid economic reforms. He has not met expectations of his voters who put him in office because he promised them better lives. He is not repealing old laws. He is not even dismantling the maze of ghastly regulations left behind by the previous government. He has a weak team that talks big but acts small. He has invited the world to “Make in India,” but I do not see what economic vision he has for the country. That needs to change and change fast.

The views expressed in this article are the author’s own and do not necessarily reflect 51�Թ�’s editorial policy.

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As the Indian economy moves forward under the leadership of Prime Minister Narendra Modi, a lot of work lies��ahead for capital markets. Even though the S&P BSE Sensex 5571.22 points (24.88%) for fiscal year (FY) 2015 that ended on March 31, investors were worried about the low corporate that did not justify their valuations. Global volatility has had an adverse impact on Indian equities, but other factors such as high corporate , low credit and high bank non-performing assets (NPA) are to blame.

Nonetheless, multinational professional services firm Ernst & Young (EY) is optimistic about the initial public offering (IPO) going forward. With a number of private equity firms willing to realize their profits through sales, and favorable macroeconomic forecasts, it seems “the listing activity in India, Middle East and Africa exchanges are also looking optimistic for the rest of 2015.”

The debt capital markets have faced a number of problems, especially in the corporate debt market. According to by Deutsche Bank AG, the size of the government bond market in 2006 was 40% of gross domestic product (GDP). This picture is bleak for corporate bonds considering that “nearly 90% of total domestic bonds outstanding [in 2006] are government issuances (i.e. Treasury bills, notes and bonds).” Research by Kanad Chaudhari, Meenal Raje and Charan Singh pointed out that the listed amount of corporate in 2011 was a paltry 2% of the GDP.

The reasons for a deficient corporate debt market in India are long, with some investors touting large fiscal deficits, poor rule of ��and��high statutory liquidity (SLR) among other factors.

As with the corporate bond market, the securitization market has yet to develop in India. The Reserve Bank of India’s (RBI) “new priority sector norms” could be blamed for the 40% dip in loan . Moody’s Investors Service affirmed that the government would do well to the securitization market for extra funding on infrastructure projects. Much is to be expected from India in the future, and the capital markets may need to revamp in order to realize the country’s enormous potential.

In this edition of , 51�Թ� talks to Amit Singh, a partner at Allen & Overy, about Indian capital markets.

Daniel Currie: Which sectors/firms are looking to enter the equity and debt capital markets? Does it all have to do with the earnings of the specific economic sectors/firms?

Amit Singh: Let’s start with the debt capital markets. The biggest issuers of debt are Indian banks such as the State Bank of India, Bank of Baroda, Syndicate Bank and other public sector banks. For a long period of time, issuances from these banks constituted the majority of the debt issues from India; however, there has been a recent rise in the number of corporate issuers from India.

A lot of laws have stymied the development of the capital markets, and the withholding tax is a specific example. Issuers have to gross up for such tax deductions making the issuance expensive. There has been some positive development, and the withholding tax has recently been reduced for issuers in the infrastructure sector. Indian banks have been able to work around this–to some extent–by issuing debt through their overseas branches, while some corporations are issuing debt through overseas subsidiaries. However, this requirement has held back many corporates (especially those companies that do not have overseas subsidiaries or those companies that may not be able to utilize the money abroad).

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Another deterrent has been the Indian external commercial borrowing [ECB] guidelines as they impose a cap on the total amount that the issuers can pay.

On the equity side, the stock markets have not been doing well for a number of years, but this has picked up of late with the new government in power.

Currie: What are investors looking for when investing in equity and debt securities?

Singh: For equity investors, the amount invested depends on growth as you do not get the steady return from a debt investment. Equity investors are hoping their shares will rise in the future as companies grow and their prospects improve. Investors do�� not care as much about receiving dividends which are, by definition, discretionary. As a debt investor, you are looking for capital conservation and prudence. You are not looking for growth as much as you are looking for a firm that can pay its interest payments on time.

It also depends on the investor’s risk appetite for yield. Highly rated companies that are in robust health can raise money in the debt capital markets at lower interest rates while others–such as sub investment grade companies–will have to pay higher yields.

Currie: How are capital markets affected by the monetary policy decisions from the US Federal Reserve/RBI?

Singh: Macroeconomic policies have a huge impact on capital markets–especially the international debt issuance from India. The current low interest regime has been a good time for debt issues from emerging economies as investors chase returns. The prospect of a rate hike by the US Federal Reserve later this year has also impacted the international debt markets, and particularly issuances from emerging economies.

Currie: Do firms and banks plan ahead on what to issue based on market forecasts?

Singh: Ultimately, there has to be a need from the issuer to issue debt, and the market environment determines if the debt can be raised at a reasonable price. Issuers certainly tend to factor in the market trend, which includes expected interest rate changes, when making their decisions.

Currie: With firms struggling with leverage and lower earnings, banks have curtailed their credit to corporations; this pattern is fueled by rising NPAs in banks. Do capital markets provide a good avenue for firms, or are investors skeptical as well?

Singh: There is some anxiety in the markets at the moment as public sector banks have suffered from high levels of NPAs. Having said that, there is still a lot of appetite for debt by such issuers as the current perception is that these banks are conservatively managed as they tend not to invest in exotic or speculative products.

Currie: Research from Deutsche Bank reported that the high SLR is curtailing liquidity in the capital markets. Will reducing the SLR be a step toward the right direction, or is the RBI justified in keeping the level of risk as low as possible at the present time?

Singh: I certainly think the RBI can loosen its regulatory grip as the high SLR requirement stands in the way of secondary market liquidity, which is a key factor for the bond market.

Currie: Do you see a fundamental risk aversion of debt in the corporate sector? How can this be improved over time?

Singh: No, I do not think there is an aversion as a lot of corporates are issuing debt. Our law firm has advised Bharti Airtel, Indian Oil Corporation, Ballarpur Industries, Bharat Petroleum and other companies on international debt issues. These firms understand how market dynamics work, and are carefully calibrating their capital structure.

Currie: Deutsche Bank research in 2006 indicated the low liquidity in the corporate bond market, while a paper from the Indian Institute of Management confirms the same result in 2011. Why has it taken such a long time to build up the corporate bond market in India?

Singh: Many different things need to be done to create a better corporate bond market in India such as liberalizing interest rates and encouraging secondary market trading. There needs to be a transition from a pledge repo system to a classic repo system in the open markets, which is seen in the more mature markets. India needs to develop an interest rate and currency swap market, robust municipal bond market and create a clear taxation system. A whole host of things need to be done in order to bolster the corporate bond market.

It is still early days as India was a closed economy until 1991.

Currie: How does the slow legal system on contracts and restructuring affect the demand and supply for bonds in the capital market? What must be done in the legal and regulatory sphere to spur the corporate debt market?

Singh: Enforcing contracts is a huge problem in India. If you issue a bond outside India, then it is governed by either the English or New York law, with English or New York courts exercising jurisdiction.

However, once you get a judgment by an English or New York court, you still have to enforce it in India, and that’s where things have not quite worked out previously.��Enforcement is difficult, if not impossible.

Currie: Securitization has increased over the period of time, yet it has not taken over. Moody’s has stated that the government can increase funding as a result of asset backed securities. Have you seen a growing appetite for these securities in the market? Does the market require certain economic conditions for securitization to take off?

Singh: Securitization of assets that originate in India remain largely restricted to traditional–domestic and foreign–bank investors who are looking to satisfy their priority sector lending targets; although recent changes made via the Union Budget 2013/2014 to the tax treatment of income distributed by the trustee have adversely impacted yields for banks. While mutual funds have also been traditional investors in these transactions, the inefficient tax structure has increased the level of uncertainty that has had an adverse impact on incentives to invest. It is not clear that the recent changes will deepen the securitization market by making it easier for certain institutions to act as trustee of relevant transactions; or whether the introduction of new codes of conduct for such trustee entities will be sufficient to overcome the disincentives to investing in securitizations.

A proper assessment of the measures required to grow the securitization market in India would require a comprehensive analysis of the current legal framework, economic conditions along with further research on market participant confidence levels.

The views expressed in this article are the author’s own and do not necessarily reflect 51�Թ�’s editorial policy.

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is emerging as an entrepreneurial haven. The Economic Survey 2014-15 placed India as the biggest startup hub in the world. According to the report, this dynamic environment is spurred by the growth in technology-based areas such as research and development (R&D) and business process management.

While there is much to be done to create an entrepreneurial environment similar to that of ’s, India is moving in the right direction. According to the Startup Genome’s report in 2012, Bangalore was ranked as the 19^th��best startup in the world.

Support is rising from many areas as Indian Finance Minister Arun Jaitley has promised increased into technology startups by creating the Self Employment and Talent Utilization mechanism; this will serve as an incubator and advisor program for entrepreneurs. The Economic Times has recently announced the first startup to honor India’s finest entrepreneurs. With Flipkart, OlaCabs, Snapdeal and a few reaching status—startups valued at $1��billion or more—it is apparent that India is cultivating a new generation of talented entrepreneurs.

However, the flurry of startups brings forth the importance of the angel investors (angels). Not to be with venture capitalists (VC), angels provide early stage investment, advice, network and expertise that are crucial to a startup’s survival. Investing at this stage of the startup involves a lot of risk as highlighted by a Forbes India ,��as��“only about one-fourth of the angel-backed companies end up reaching [series A funding].” Even with all the risks, the abovementioned article finds that the number of angel deals increased from six in 2006 to 200 in 2014.

In this edition of ,��51�Թ���talks to Raghav Kanoria, a��co-founder and co-president of Calcutta Angels Network, on the outlook for angel investing in India.

Daniel Currie: With the level of entrepreneurship rising in India, there must be a flurry of startups looking for capital from angel investors,��especially in the early stages. Other than money, what do entrepreneurs look for when searching for angels?

Raghav Kanoria: Angels typically take board seats depending on the number of seats available, while those with a larger stake in the firm get board seats. Recently, investors have taken on different roles such as board observers and committee members, depending on the structure of the mentorship panel. Nonetheless, investors look to advise companies on growth and funding strategies for the next stage in the startup.

Entrepreneurs scan for specific attributes of an angel investor; if the startup is placed in the technology sector, then entrepreneurs will look at the angel’s expertise. In addition to the money, entrepreneurs want to tap into the angel’s network and value-added skills.

Currie: What do angels look for when making investments in startups and firms?

Kanoria: Angel investors search for a good team that has relevant experience in the sector of their startup. There should be a large market opportunity, and the startup must possess the scalability to take advantage of the potential.

Investors take care to evaluate exit opportunities as they need to make a financial return on their investment.

Currie: According to a working research by G. Sabarinathan, “A large number of angels have come into existence over the past decade.” Do you have suggestions on how to continue this trend?

Kanoria: Firstly, people need to realize that angel investing is different from investing in firms in the stock market. Angels have to guide and��help entrepreneurs through the process of building a company, rather than just providing them with capital. Normally, the entrepreneur does not have the relevant experience in tax, finance and building a team—which is how angels need to add value.

The [Indian] government has been trying to spur the level of angels by creating a panel—that��features people from relevant industries—to formulate policies that benefit entrepreneurs and investors. The increase in investment on technology parks and business incubators will provide the necessary mentorship to help startups. While there are proposed talks on introducing tax breaks for angel investments, there has not been any implementation of such measures.

Currie: What is the usual duration for angels before exiting the startup? Has this investment horizon increased or decreased over time, and is this a positive development?

Kanoria: It takes three to��five��years, on average, for angel investors to exit because the startup goes through multiple rounds of fundraising. Angels normally exit when the VC buys the stake from the�� investors.

The investment horizon has decreased from four to six years to three to five years because of the increasing number of VCs that are looking to buy out the stake of the angel investor.

Currie: With the decline in the initial public offering [IPO] sentiment this year, what are the best exit strategies for investors at this time?

Kanoria: The best exit strategy for angels is to raise money from another financial investor because they know how to raise the equity value of the company over time. Strategic investors are good for mergers and acquisitions as they want to acquire startups that fit into their business philosophy.

The least preferred option for an exit strategy is through an IPO. Public markets do not pay attention to young companies that lack the track record of generating profits; this is the case for a lot of startups.

Currie: As entrepreneurial zeal continues to grow in India, do you expect a rise in “unicorns” in the near future?

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Kanoria: There are a number of sectors that will provide immense valuations in the future. The online food business, which includes ordering, listing, as well as buying groceries, will take off now. Quick service restaurants are forecast to do particularly well in the future. In essence, any retail segment is poised to garner great valuations.

The increasing demand for mobile phone transactions will also spur startups as more Indians have mobile phones than computers or laptops. A lot of cloud-based companies are likely to come forth due to increased demand for cloud based businesses.

The consumer internet market is slated to take off, and the rise of Info Edge is a testament to this trend. The company has specific verticals that they can take forward to expand.

I expect the abovementioned sectors to generate billion-dollar valuations in the future. India is at the tip of the iceberg, because the country has a lot to do to create a startup environment that matches the US entrepreneurial culture. Once the correct environment is fostered, then there will be a rise in the number of Indian-based “unicorns.”

Currie: What specifics do you look for when investing in a firm? Is there a particular financial metric��that usually guides how you invest, or do you look for the management expertise or team-based factors?

Kanoria: Financials are not a main concern at the startup stage because it is too early for these firms to generate strong financial statements. The financial model comes at the venture capital stage.

My main concern is the size of the market opportunity, and how the startup team is working to meet it. A crucial metric I look for is the increasing number of users—of the product or service—over a monthly basis; this is similar to the customer acquisition rate over a period of time.

Currie: When choosing a portfolio today, do you look for diversification across sectors, or do you diversify among different firms in one or two burgeoning sectors?

Kanoria: It is always good to diversify across numerous sectors because you never know which team is going to do well from a particular sector. It is a dynamic economic environment, and it is likely that teams in specific sectors will not be able to generate the necessary profits for the angel to attain a return on his/her investment.��It is always prudent to diversify across sectors.

Currie: According to a��Forbes India article, investors look for scalability and large market share. These investors also note the importance of low capital expenditure required for further expansion, which may create a playing field fit for technology-based firms. How do other firms in different sectors compete to attain money from investors? Are we seeing technology pervade through every sector?

Kanoria: Everything that is technology-enabled is highly scalable as the firm only needs to setup a product, work on R&D and attain sales. There is no need for immense incremental investment once you attain sales for the technology-based product.

There is a regular need for capital expenditure investment for non-technology businesses. Another deterring factor is the level of risk associated with a firm that is not technology-enabled.

Investors prefer technology-based firms because of the level of scalability involved. If a company attains more consumers with a low level of initial capital—and in a short period of time—then it will be a worthy investment for the angel.

These statements reflect the author’s personal opinions, and they do not reflect the company’s interests

The views expressed in this article are the author’s own and do not necessarily reflect 51�Թ�’s editorial policy.

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The calendar year 2015 has been an eventful time for the Reserve Bank of India (RBI), as the Indian central bank has cut interest rates by 75 basis points (bps) or 0.75%. The first two repo rate cuts took place the scheduled RBI meetings on 15 and 4, due to a number of reasons ranging from falling oil (feeding into lower inflation) to weak capacity . Interest rate cuts were also made possible by the prospect of a more disciplined governing regime, as the fiscal deficit is expected to hit 3% of gross domestic product (GDP) by fiscal (FY) 2018.

On June 2, 2015, the RBI reduced the repo by 25bps to 7.25% while keeping the cash reserve ratio (CRR) and the statutory liquidity ratio (SLR) unchanged at 4% and 21.5%, respectively. Such measures may have been taken to spur the��Indian economy that had recently suffered from poor corporate ��and low credit .

Further compounding the weak statistics is the tepid monetary transmission mechanism, as banks have not reduced their base rates by as much as Governor of the RBI Raghuram Rajan had hoped. Banks have cited large amounts of non-performing assets (NPA) as a crucial impediment for credit growth.

The consumer price inflation (CPI) rate has been tamed as the measure rose by 4.87% in April from a year ago, which is still below the 6% inflation target set by the Urjit Patel report. Yet weak monsoons could lead to higher inflation through food costs that could limit further interest rate cuts in the future. This sentiment was affirmed by the central bank as it recently forecast inflation to 6% by January 2016.

With many pressures stemming from domestic and foreign markets, the RBI also faces a problem with the formation of the monetary policy committee (MPC). While Rajan wants to maintain autonomy of the RBI’s monetary policy regime, Finance Minister Arun Jaitley for more government representation.

In this edition of , 51�Թ� talks to Manu Sharma, an editor at CVoter International, about the RBI and its monetary policy stance.

Daniel Currie: On June 2, the RBI lowered the repo rate by 25bps to 7.25%. What were your expectations for the RBI?

Manu Sharma: I wanted the RBI to reduce rates by 50bps rather than 25bps. At the moment, growth has not panned out as much as it was expected from the Indian economy as there are a number of structural constraints that may deter firms from investing in capital expenditure. The large amounts of NPAs on the banks’ balance sheet will also result in a low pass through of repo rates to bank lending rates.

Currie: You mentioned that you expected a larger interest rate cut. But with the unpredictability of monsoons, is the RBI being cautious on inflationary pressures in the near future?

Sharma: The picture is convoluted at the moment for a couple of reasons. Firstly, we are still unsure about the level of rainfall being above or below expectations, as the best time to understand the level of rainfall is to wait for the monsoon.

However, if there is a deficient monsoon, then the government can utilize its buffer stocks to ease the pressure on inflation. If the government cannot manage the buffer-stock scheme effectively, then there may be higher inflation in the future.

Raghuram Rajan / Flickr

Currie: What are your expectations for the repo rate in the upcoming months? Do you think Rajan will cut the CRR or the SLR?

Sharma: The movement of repo rates in the future will depend on the growth rate of the Indian economy and inflation rates. If sustained low oil prices lead to lower inflation, then the economic environment could be conducive for the interest rate cut.

There should not be any tinkering with the CRR and SLR, because those measures could affect larger dynamics than the RBI would prefer. Currently, Indian banks are saddled with a lot of NPAs, and it would be prudent to not change the liquidity norms at this time.

The best measure would be to reduce the “cost of funds” through the use of the repo rate.

Currie: With the current trajectory of the economy, what repo rate hike/cut do you expect by the end of 2015?

Sharma: By keeping a close watch on the unwinding of bad debt and stressed assets along with the performance of the stock market, a rate cut of 25-50bps is expected; a cut of 50bps would be optimal.

Currie: What sectors of the economy are likely to benefit from the interest rate cut in the short- to medium-term?

Sharma: Interest rate cuts benefit small to medium sized enterprises [SMEs], as well as retail consumers. The level and cost of credit helps SMEs with capital investment. Larger firms can source funds from anywhere in the world, which means they are not as affected as SMEs are with changes to the repo rates.

Currie: Why has the monetary transmission mechanism taken a long time to pass through to bank lending rates? What are the specific impediments to monetary policy transmission in India?

Sharma: An understanding of the monetary transmission mechanism requires an analysis of the aftermath from the 2008 financial crisis. The previous US president, George W. Bush, passed the Troubled Asset Relief Program (TARP) to buy distressed assets from banks; however, it did not jumpstart the economy. Financial institutions tried to shore up their balance sheets by either issuing fewer loans or buying treasuries. This is known as financial disintermediation as banks made safer investments to ensure their survival after the financial crisis.

India is facing the same situation at the moment, considering the system used to work on burdensome regulation and crony capitalism. At the present time, banks have a large amount of NPAs on their accounts. Even if there are cuts in the repo rates, banks are not willing to lend because they are worried that their financial situation could worsen over the upcoming months. Indian financial institutions are using the time to bolster their balance sheets by either buying safer assets or cutting their lending.

The specific impediments to monetary transmission are cyclical and structural factors in the economy. The former results when a rising share of NPAs weakens the bank’s balance sheets, leading to subdued lending growth. There is also a form of “window dressing” as banks will try to not publicly disclose the number of stressed assets on the account books. This tends to be a short- to medium-term phenomenon; however, it is in the interest of the RBI to ensure that this does not become a medium-term problem.

Structural factors are borne out from the inefficiencies in the economy that range from the amount of financial inclusion to the size of the parallel economy. Before the advancement of the Pradham Mantri Jan Dhan Yojana program, a large number of individuals were not part of the formal banking system. The monetary transmission mechanism will be strengthened with more financial inclusion.

The size of the parallel economy can also disrupt the monetary policy transmission mechanism. Individuals and businesses that are part of the parallel economy may not be as affected by changing interest rates than those who are part of the formal economy. In order to fix this problem, the government has to find a way to curb the size of the parallel economy.

Currie: Why does the RBI concentrate heavily on policy rates affecting bank lending rates when there are other channels that could be as effective, such as the exchange rate channel?

Sharma: The tinkering of exchange rates has political and financial ramifications. In addition, people remember the balance of payments crisis in 1991 that resulted in reserves being used to pay for the high import bills. With memories still fresh from the time, the RBI wants to stay away from too much financial intervention on the exchange rate through monetary policy. Finally, the exchange rate channel also has limited effectiveness.

Currie: What are the regulatory tools that the RBI and government can use to strengthen the monetary policy transmission mechanism?

Sharma: The government must pursue financial inclusion while reducing the size of the parallel economy. The RBI should do whatever it can to further the abovementioned goals for the future.

Currie: Has the government been effective with these reforms over the past year?

Sharma: The government has worked fast with the black money bill, which will allow authorities to crack down sharply against the people who park their money in safe haven countries; thereby reducing the size of the parallel economy.

There were initial differences between the RBI and the government concerning the implementation of the Pradham Mantri Jan Dhan Yojana program. Nonetheless, it has largely been a success, even though there are some authenticity problems surrounding the newly opened bank accounts. The RBI and the government have worked as a team and criticized each other when necessary; this is beneficial for the country going forward.

Currie: Rajan made two unscheduled 25bps interest rate cuts in January and March 2015. How do unscheduled rate cuts impact forward guidance by the central bank?

Sharma: Forward guidance, as a tool to affect the level of expectations around the level of interest rates, is weak in India relative to how it is used by the US Federal Reserve. While people may have called the previous rate cuts as “unscheduled,” market participants had already factored in the information. The government had long been asking for interest rate cuts, and Rajan went on record stating that interest rate cuts were likely at the time.

The exact timing may not have been known, but people were expecting the interest rate cuts. This was not a good example of unscheduled rate cuts, and it did not adversely affect forward guidance by the RBI.

Currie: What variables are required for Rajan to consider rate cuts outside the scheduled meetings?

Sharma: Any “unscheduled” rate cuts are contingent on growth and inflation measures. If there is increasing volatility with the inflation rate, the RBI will have to use the repo rate to counter.

The larger macroeconomic structure will also be taken into consideration, as Rajan will want to see the Indian economy attaining stronger growth into the future. There is also a lot of pressure on the financial system to help on this end by facilitating increased amounts of cheaper credit to the economy.

Currie: The “taper tantrum” in 2013 caused a lot of turbulence in financial markets as foreign capital moved away from emerging markets. What does India need to do to be in a better position to withstand any mass outflow of foreign capital?

Sharma: With the Federal Reserve planning to unwind the program a few years ago, the banks reversed their positions in emerging markets.

A country can only partially protect itself from a capital flight episode. If it is a cyclical movement of money—impacting the Indian economy for a month or two—then it should not be a great problem. However, if the capital flight is large enough to cause systemic disruption in India’s business climate, the effects could be detrimental.

The government could institute circuit breakers that would curb the amount of exposure that foreign institutional investors [FII] have in the Indian capital markets; this could be levied on FIIs because such funds can be moved quickly from one country to another causing numerous problems.

Foreign direct investment [FDI] should be given full autonomy because they involve a longer-term approach on the Indian economy. The importance of ensuring the FIIs do not grow to a large proportion of the capital markets can be explained by the simple analogy of a diversified portfolio. India would not want all its investment to be in the form of FIIs, rather it should diversify its investment sources.

Currie: Rajan recently gave a speech at The Economics Club in New York on the problems of uncoordinated monetary policy from various central banks. Should central banks care for the effects of their monetary policy on the global environment as long as they achieve their domestic and legal duties?

Sharma: Rajan studied in the United States and worked as the chief economist of the IMF [International Monetary Fund]. His experiences have given him an international approach to central banking, along with an appreciation of the positive and negative externalities stemming from monetary policy decisions on the global environment.

However, central banks in democratic economies face constant pressure on their level of autonomy from their respective governments. It is a challenge to achieve the current central bank mandates in many economies, which makes it unfeasible to achieve coordinated monetary policy at the time being.

Currie: You mentioned “at the time being” in your last response considering coordinated monetary policy. Do you see a framework created in the future to accompany a more global organized approach to monetary policy?

Sharma: At the moment, the US and European central banks usually move in tandem even though the former may raise interest rates in the near future. The Organization for Economic Co-operation and Development’s [OECD] membership of countries pursue some form of policy exchange; this takes place to a lesser extent with the Brazil, Russia, India, China and South Africa [BRICS] and frontier economies.

Once the BRICS economies contribute a greater share to the global GDP, then the OECD countries will pay greater heed to their monetary policy stances.

Currie: Oil prices have fallen, the US economy has not achieved “escape velocity,” while the Modi effect has buoyed investors on India. Has Rajan battled inflation and commanded the RBI well, or are his successes largely based on luck?

Sharma: There are many experts who say inflation is a supply side phenomenon. The limited capacity to meet the growing demand for resources will cause the Indian economy to overheat. Over time, lower oil prices have contributed to subdued inflation rates, but the productive capacity is still suboptimal, thus leading to higher inflation pressures.

Rajan has performed well with policy and leadership of the RBI; however, the successes from taming inflation can be attributed to luck.

Currie:��A��Harvard University economist, Gita Gopinath, disagreed with the government’s stance to “do away with the distinction” between foreign portfolio investment [FPI] and FDI because it would increase volatility in capital flows.��Do you agree with Gopinath? Why or why not?

Sharma: I agree with Dr. Gopinath’s view because FDI flows bring the promise of entrepreneurial energy and managerial assets to help the Indian economy.�� FPIs can increase volatility in the markets as funds can be moved from one location to another with a few clicks on a computer, making the distinction between FDI and FPIs an important one.

Currie: The recent Urjit Patel report has made inflation targeting the mandate for the RBI. Why has India not considered the dual mandate of price stability and full employment that the US Federal Reserve has upheld?

Sharma: It would be difficult for the RBI to do justice in a dual mandate scheme because it is hard to meet the desired level of employment. It will be an onerous task to get unemployment to fall below a certain level—especially with a large youth population—and this is compounded with a large parallel economy. Targeting inflation has the necessary effect of increasing the employment of resources in the economy.

To increase employment, the RBI can only tinker with the formal economy, even though a large parallel economy exists. The government can reduce the influence of the parallel economy by lowering the regulatory burdens for SMEs. Reducing the paperwork required to start a business will allow entrepreneurs to consider registering their businesses with the government.

Currie: The MPC that needs to make decisions on monetary policy has yet to be formed. Jaitley thinks the board should not have a majority of RBI members, while Rajan disagrees. How would you structure the MPC: Should the government or the RBI have a majority?

Sharma: I side with the central bank on this issue, as it is imperative to preserve the RBI’s autonomy and power. In India, the government continues to fall prey to populist politics, which leads to a lot of emotional decision making and erratic governance. Economists and technocrats at the RBI are insulated from this, and they will make decisions based on what is right rather on what is popular.

The views expressed in this article are the author’s own and do not necessarily reflect 51�Թ�’s editorial policy.

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Many foreign and domestic investors were jubilant when Narendra Modi became��the new Indian��prime minister in��2014. The upbeat market sentiment in India was expressed with a 27% in foreign direct investment (FDI) to $30.9 billion in fiscal year (FY) 2015. Foreign Institutional Investors (FII) have also poured money into India in FY 2015, with $17.9 billion specifically designated for Indian .

While the trend is positive, there are issues ranging from weak corporate to high levels of non-performing assets (NPA) in banks—which is enough to cause jitters. Moreover, the government has come under scrutiny for trying to impose the minimum alternative (MAT), which could be applied to firms; this could result in a large cost for companies and become a critical deterrent for foreign investment.

Nonetheless, the first year for the prime minister has resulted in a change of outlook. Modi garnered widespread interest for India with his extensive travels around the world, and he promised infrastructure investments to bolster the economy. According to a Times Now , 52% of the public believe that Modi has successfully tackled corruption, and 66% prefer him over his rival, Rahul Gandhi.

Modi is not without his detractors as many people at home and abroad have criticized the slow pace of reform. The above-mentioned poll found that 65% of the public noted the glacial pace of economic reform. The land acquisition bill (land bill) may allow India to unleash its potential, but it has met fierce on account of the unfair treatment that farmers may face from corporations. The goods and services tax (GST) could finally pave the way for a proper tax between states and the central government. Investors are eagerly waiting for results on big issues such as the land bill and the GST. Modi says he does not want to disappoint.

In this edition of , 51�Թ� speaks to��Russell Stamets, a Delhi-based lawyer, author and business advisor, about foreign investment potential in India and how the government can entice others to invest in the country.

Daniel Currie: What do foreign investors look for before investing or building a business in India?

Russell Stamets: Investors do not look for anything different when analyzing India; they expect investment returns and strong growth. People look for growth potential before they invest in a business located in India. But investors look for the same set of metrics and fundamentals as they would do so in any other market, however, the expectations would vary depending on the market size.

It is noteworthy that some investors do not care about accounting and integrity issues when moving to developing countries. This line of thinking hurts them as they get embroiled in scams and corruption.

Private equity or venture capital firms are usually looking to invest or operate in an environment that showcases growth potential, and they also want to see firms that display a strong ethical foundation.

If direct investment is considered, then investors analyze the restrictions on the sector and general business climate—which could include onerous government regulation or heavy competition. These are some of the critical questions that investors look to answer before moving operations or funds into any country.

Currie: What do foreign investors expect from Prime Minister Modi for the next year?

Stamets: He needs to take realistic actions and showcase demonstrable advances on the ground. The last government was so bad, and so mired in confusion, that even a little forward motion and clarity is welcoming. But Modi needs to move forward, and there is every reason to think he will.

Currie: Is he being too idealistic when setting goals, considering that many will not be met?

Stamets: I think it is great that Modi is showing such ambition. Let me quote the Chicagoan architect Daniel Burnham: “Make no little plans; they have no magic to stir men’s blood.” You have to appreciate the enthusiasm and chutzpah he’s showing. But let me use a baseball metaphor for a cricket-crazy country: If you point to left field and promise a home run, then you better be ready to hit. Can Modi do more than talk about hitting? That part is not clear yet.

If he does do what is expected of him, then it will be a better place for everyone; it will help the whole world. As long as his measures provide clarity and guidance so that the factors of production can be organized to their best means, then there could be better times ahead for the Indian economy.

Currie: How will��the interest rate cuts on June 2 by the governor of the Reserve Bank of India, Raghuram Rajan, affect the level of foreign investment over the upcoming months?

Stamets: Rajan is a hero to everyone who appreciates facts and logic. Of course he is going to do great things for India. He is practically from Chicago! His wife teaches law at the University of Chicago; a nice Chicago family, in short.

Nearly everything he does will invite more investment into India that will ultimately help the people. He is great for the country as he is competent and independent with his views, which makes it difficult for any Indian politician to ignore him.

Currie: What are the cultural specifics that investors look for when they move to India?

Stamets: I think people should focus less on any magical cultural understanding and more on listening to customers. General Motors Company (GM) has languished trying to sell cars that are badly adapted to the Indian market, while Hyundai has thrived by building awesome vehicles; the latter company has grown from a small startup to a market leader. It is not that the Hyundai employees were more polite than those from GM. When a company cares about the needs of its customer, wherever that customer is, then it is usually rewarded.

India is a great illustration of this, as Hyundai has outdone Tata in the car market. So tell me how much it matters that you have cultural insight? Listen to your customers, build a great product and you can succeed in India.

Currie: According to recent news, there has been some trepidation from foreign investors for a host of reasons. What should the government do in the short- and medium-term to allay the anxiousness felt by foreign investors?

Stamets: First, the government must acknowledge the validity of the anxiety rather than blaming the victims for expressing that sentiment. There is a deep lack of self-awareness at the highest levels of authority, coupled with a general indifference—not to mention corruption.

Much of the problem stems from the rapacious and capricious tax policy. Since the economy has not fulfilled its potential and generated tax revenue, the government has decided to extract money from foreign investors; if this activity stops, then the anxiety would improve overnight. The government’s approach to taxation is a short-term answer to funding national programs. With barely any confidence in their own growth plans, the Indian government looks for someone else to fund it.

Currie: What does India require more off: FDI��or FII? Why or why not?

Stamets: India needs more investment. It is imperative to understand that in many important ways, India is not at all a poor country. But it is so far behind on so many significant needs that it could never fund all those necessities without massive foreign investment; it is a simple fact.

I would favor FDI because it is long-term, and it provides broader changes and improvements for the Indian people. FII requires the notion of “trickle down” economics to work. Nonetheless, both investments are required in huge amounts to meet the investment needs of the Indian economy. But without major clarity and sanity on tax policy, the Indian market will continue to see FII and FDI flee the country.

Currie: The government seems to have adopted a piecemeal approach when it is opening up the��economy (defense and insurance) to foreign investors. Will this gradual approach reap better results for an��Indian economy that is already notorious for reforming at a slow rate?

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Stamets: India can—and should—move faster for its own sake.�� The country has taken a painfully slow approach to liberalization, but this has been helpful at times. The government needs to show that it is choosing its speed, however, by going faster when opportunity knocks. While opportunity presents itself, the country still moves at the same rate.

Currie: You mentioned in a post��on the FCPA Blog that protectionist measures and corruption helped some businesses flourish during the License Raj. Has Modi been successful with his promise on a paradigm shift against corruption in business and politics?

Stamets: Modi has continued the trend toward accountability that has taken serious hold in the last five years. While there was a change taking place against routing corruption prior to Modi’s reign as prime minister, he can be credited with being part of the change. His tough stance on corruption is one of the qualities that brought him to his current role, and he is accelerating the change toward more transparency in politics and business. This is a big change, but Modi is riding an existing wave.

Currie: With your last post on��the Aam Aadmi Party—that it has returned to the fore to tackle corruption. However, most governments try to tackle corruption. What needs to be done to give political parties staying power with a new generation of Indians coming to the ballot?

Stamets: Over the past ten years, the Indian population has intensified the pressure on politicians to produce results. At the very least, the government will have to pretend to do something for the people—this is a big development for India. Politicians are starting to care because they know that they have to perform or they will be voted out of power.

Currie: Can this ten-year development be attributed to the younger generation of Indians?

Stamets: It is not about age, but about attitude. Indians of all ages are taking a look at the world and deciding that their country can do better. If Indians can achieve so much working at the highest level of technology, finance and science in other countries, then why are the same results eluding its people in India? Everyone is asking that question and demanding an answer. We are seeing professionals of all ages take an interest in political action, and this is something the good “middle-class” people would have avoided before. The new engagement across the country is a real treasure and a reason to be excited for the future.

You should see the example of my dear friend R.K. Mishra, who runs the Indian Council for Public Private Partnership in Bangalore, who has spent the better part of the last decade making a real difference in the mess that has overtaken the otherwise beautiful city. As a leader, he has helped government work more closely and effectively with the private sector and local people. He is a great example of the new wave of practical activism undertaken by successful Indians who would otherwise have shunned politics a generation ago. It’s a spectacular social change.

Currie: What are the three biggest concerns for the economy going forward that Modi should solve?

Stamets: The great thing about India is it would take so little to really unlock its potential. The tragedy is that the government has simply refused to do this for so long. There are no mysteries on what would help India leap forward.

First, poor infrastructure is a constant drag on the country’s economic growth. There is general agreement on this.

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This is followed by poor access to health care, which is compounded by a highly polluted environment. On average, Indians are shorter and have lower life expectancy relative to people in other countries; maternal health is poor, on average. Bangladesh, which is economically far behind India, has better quality of life achievements. India’s poor performance in health is a choice.

Personally, I think the third ingredient for growth is a simple willingness to face reality and to make hard choices. Modi must embrace a level of practicality to make a difference of the ground, and the Indian people have yet to see that take hold.

Currie: Modi has made an impact as he passed bills and traveled the world to attain investment for India. What has he done poorly since his time as prime minister?

Stamets: Nobody would accuse Modi of having a strong team behind him, and no one would accuse him of being too solicitous of the views of others, inside or outside of his government. Also, no one would accuse him of including too many South Indians in his inner circle.

Despite boasting strong leaders in finance and power, his political cabinet has too few bright spots to remove the feeling that this is a “one-man show.”

Currie: Many analysts have mentioned the importance of the contentious “land bill” in improving the ease of doing business and the country’s infrastructure. As a lawyer, does the removal of five categories (defense, rural infrastructure, affordable housing, industrial corridors and infrastructure projects) from attaining 80% consent from��landowners, along with doing��a social assessment, make much difference in the “ease of doing business?”

Stamets: The prime minister and his team have said they will continue to pursue clarification of the land bill despite any opposition. We need to change the way land is acquired if we are going to tackle the huge infrastructure problems in this country. Any progress on this front should be welcomed and respected because it does carry political risk. He is willing to fight for the bill, and it is welcoming to see.

Currie: Should Modi change the ordinances of the land bill in any way?

Stamets: The prime minister is taking a principled stance as he is learning how to fight national issues. Modi must show that the land bill creates immense value for the economy going forward. The opposition is completely unprincipled in this matter, except for the communists, who are principled but wrong.

Currie: On the whole, how has the government fared with the “ease of doing business” reforms in the country?

Stamets: Business is better, but it could hardly get any worse. The previous government threw unpredictable and unjust tax policies at the economy—income, corporate and the MAT—that can be blamed for eviscerating economic rationality and tarnishing its image as an honest trade partner. Nonetheless, the present government has done little to change the law. Finance Minister Arun Jaitley even defends the current system by asserting that India is not a tax haven. I can attest that no one in the history of mankind has accused India of being a tax haven.

Predictability and certainty are fundamentals to economic activity, but the Indian government continues to behave in an erratic fashion on taxation; with the promise of blaming anyone who points this out.

Currie: Does the reduction of corporate tax from 30% to 25% in four years not satisfy investors?

Stamets: It is not about rates, but how it changes. The government has been proven an untrustworthy partner to the private sector—especially with the Vodafone-Hutchison tax case. The irrational approach to taxation has naturally deterred foreign investors, but the government does not acknowledge this in any meaningful way. If I throw you in jail, promise you candy and tell you I will not do it again, will you believe me? The underlying economic growth has not returned, and the government is trying to finance its ambitions on the backs of foreign investors and the moneyed class in India, without really improving the general economic conditions. You can predict how that will turn out.

Currie: With the election in Bihar coming up, how can the government pass the land bill and keep a favorable outlook with farmers and poorer individuals?

Stamets: Hiding behind elections is one of the classic ways politicians have avoided making tough choices in India. I think the times and the electorate have changed and people are demanding better performance. There is plenty of good research showing that Indian politicians will adopt causes they think will help them at the ballot box. Who would have imagined ten years ago that so many politicians would be speaking out about corruption? The land bill is the same way—a strong politician will be able to sell this to the people.

Currie: With the amount of problems and protests that have taken place on the Land Bill, will we see the Goods and Services Tax (GST) bill passed in July 2015? What will it take to get this important bill passed?

Stamets: The GST is important because it is the most sophisticated discussion of center-state relations since Indira Gandhi’s period; this bill is an important and positive development for the maturing Indian democracy. All the important participants seem to have accepted that we will have GST; we are in the final lap on this.

This is a positive development for foreign firms that want to come to India. It may not simplify matters, but it will bind the country together in a more rational fashion.

Currie: With your extensive experience with the corporate legal sphere, what have you heard from business people and lawyers on the way the economy has been run?

Stamets: I can tell you without any reservation that this is the best time to invest in India in the last 20��years. We are at a great inflection point, but that does not mean India will succeed. The smartest along with the India-savvy people I know consider this the best opportunity any of [them] have seen and are likely to see for a very long time.

The views expressed in this article are the author’s own and do not necessarily reflect 51�Թ�’s editorial policy.

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We bring you perspectives from around the world. Help us to inform and educate. �۴dzܰ�����is��tax-deductible. Join over 400 people to become��a donor or you could choose to be a��.

The post Foreign Investment Potential in India appeared first on 51�Թ�.

Ever since Indian Prime Minister Narendra Modi entered office in 2014, a positive reversal of the economy was expected. India’s economic situation deteriorated under the previous government, and the United Progressive Alliance was punished with a loss in last year’s election.

While India’s was shielded through the financial crisis due to��a growing middle-class, low ��and a conservative banking sector, the country did see a fall in gross domestic product (). Troubles grew for the previous government as India’s consumer prices—a measure of inflation—rose at 10% annually as were high and rural wages grew at 15% over five years by 2013, outstripping productivity growth. GDP growth was stifled as a result and the poor were greatly affected.

Currently, India’s economy is heralded as a shining beacon among the emerging market economies, as the International Monetary Fund (IMF) recently updated the country’s GDP growth rate to 7.5% for 2016. The 2015��budget has promised marked improvements in capital expenditure to allow India to become a manufacturing hub. A cut in corporate to 25% over the next four years, along with measures to combat corruption and black , should galvanize investor confidence.

However, the pressure has grown on the government to deliver on the reforms promised, as investors such as Jim Rodgers have the Indian administration��for its inability to swiftly enact policies. Time is running out for the government to take serious steps to improve the economy that will reward investors for their belief.

In this edition of��, 51�Թ� talks to Sunil Asnani, a portfolio manager at Matthews Asia, about India’s economic potential with and without reforms.

Daniel Currie: What do you think are the drivers for the Indian economy going forward?

Sunil Asnani: Reforms that encouraged liberalization in the early 1990s allowed consumers to reap the benefits from increased choice, which accelerated growth. While reforms took place on the output capabilities of the economy, more work needs to be done on the factors of production: land, labor, capital, along with businesses efficiency. With reforms taking place on the factors of production, India will witness increased efficiency and accelerated growth.

As reforms liberalize India’s factors of production, Indians will see better productivity within these sectors. This will lead to a decline in inflation that will allow for more investment in the future.

Currie: By “reforms,” would you say that the government needs to work on cutting down bureaucracy (red tape) or introduce other supply side measures?

Asnani: By reforms, I mean both policies and their execution. For example, the lack of infrastructure makes it difficult for farmers to get crops to the market. The result is an increase in the prices of crops for consumers as the extra time and distance of travel for the farmers cause 20-30% of fruits and vegetables to perish, and only 6% of the perishable foods are processed.

Farmers also face difficulties on the pricing front as they have to sell a part of their produce through regulated marketplaces, which does not allow for grade-based pricing. This is a disincentive for farmers to grow better quality crops.

The sheer number of middlemen between the farmer and the market causes mispricing and hoarding. To change all of this, one has to affect the right policies and enable investments in infrastructure. It is more than just “red tape,” as it depends on the type of policy enacted as well as its execution.

Currie: Analysts from major banks have cited a lack of short-term structural reforms, which could include subsidies among other things. Did you find the 2015 Union Budget of India lacking in any sort of specific reform? If so, how is it that Prime Minister Narendra Modi did not seem to get Finance Minister Arun Jaitley to form a more aggressive budget?

Asnani: Prime Minister Modi has to get support from his own coalition, as well as from other parties in order to attain desired results. After Modi’s party, the BJP [Bharatiya Janata Party], lost the Delhi Legislative Assembly election in 2015, the party might draw wrong lessons and resort to populism—some signs were visible in the recent budget. The BJP-led coalition does not have a majority in the Upper House of the parliament of India in order to get many important reform bills passed.

To reinforce its future, the BJP coalition has to win political support in state legislatures, which would eventually feed into more support in the Upper House. The party might be in a “catch 22” situation as it would have to win elections, which might tempt them to be less reform centric in the short-term so as to be able to make critical reforms in the long-term.

Currie: It has been a turbulent year with the US Federal Reserve and Bank of England thinking of increasing interest rates, along with Russia’s and the eurozone’s struggles.��What are the greatest risks for Indian equities as well as the Indian economy?

Asnani: Concerning the short-term horizon, there will be risks stemming from the inevitable rise in US interest rates. Money will flow away from certain markets in India, and this could cause a few problems for Indian equities.

However, the real risk comes from the companies’ changing fundamentals. If the company is able to maintain an advantage over its competitors as well as generate stable profits and cash flow, then the firm should not be at risk. Companies dependent on policy measures—passed by the government—will be considered risky in this environment.

Over the long-term, India is less dependent on the rest of the world for its growth. Structural reforms will take time, and India has shown that it can grow without reforms, though there can be accelerated growth in the long-run if the government is able to implement key reforms.

The real risk in the long-run comes from lack of reforms, as it will lead to slower growth and lower productivity; this may sustain high inflation in the future.

Currie: Is there anything you would advise Finance Minister Arun Jaitley or Prime Minister Modi on encouraging diversification along with sustainable Indian economic growth?

Asnani: India is already diversified; the country is probably one of the more diversified economies to choose from. There is a misconception that India relies heavily on the information technology sector; however, if you look closely, it does not amount to as much as you would think (around 6-7% of GDP).

Currie: The government announced the “make in India” program, which is to make the country��a global manufacturing hub. Should the government try to aggressively pursue the “make in India” program? Is it not the time for India to stick to de-industrialization? If not, should the country refine the program in any way?

Asnani: India’s GDP is heavily skewed toward services. In order to provide some perspective, you must think about the information technology services sector. It is an important sector as the salary per person tends to be high, but it only employs a tiny fraction of the workforce—lower than 1% of the population.

The “make in India” program could galvanize manufacturing in India, as well as provide more jobs than some areas of the services sector such as IT.

A couple of important suggestions to the program include environmental sustainability and social security. As for the latter, it is apparent that there will be slack labor laws. The government must focus on making sure that workers are not subject to harsh treatment in any work environment.

My personal view is that the “make in India” program is not a bad idea.

Currie: What is India’s comparative advantage that makes it stand out from other emerging markets?

Asnani: From an investor’s perspective, I can say that India is a resilient economy that is able to cope with difficult times. The three factors that differentiate the Indian economy include diversity, demographics and entrepreneurship.

India can count on its diversity because the country does not heavily rely on one sector for growth. The variety of strong sectors will allow for India to generate sustainable growth in the future.

The abundance of young people entering the job market provides the private and public sector with a strong workforce to drive India’s economic engine. Finally, as India’s population is increasingly embracing entrepreneurship as people are choosing to leave their paid jobs to start their own firms, that can inject innovation to attain higher levels of economic growth.

Currie: What are your thoughts about India at the moment? Are you optimistic about the way reforms are enacted? Or are you comfortable with a “wait and see” strategy to see if reforms are achieved?

Asnani: I take a realistic view on India. There are many investors who swing between excessive optimism and extreme pessimism. I am confident that the government should be able to make executive reforms, which pertain to making government efficient, accountable and business-friendly. However, making legislative reforms might not be easy considering the political support enjoyed by the current government.

Asnani: I look at companies that are “masters of their own destiny,” as I want to know that managers are able to lead their companies through the good and bad times in the economy. Any firm that relies on political policies and reforms as a way to grow provides a risk.

Currie: What do��you look for specifically in Indian companies, especially in this environment? Are there specific multiples or cash flow that piques your interest?

The company must also be able to attain a sustainable return given the cost of capital, but the management team must showcase entrepreneurship as well as honest stewardship. I believe that good stewardship, along with good business practices, can protect investors from downsides in the company’s returns.

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Currie: If reforms are enacted effectively, then India should grow over the upcoming years. At the present time, how does your approach in choosing stocks vary with the economic environment? Is it a time for defensives or cyclicals?

Asnani: I look for good companies with strong fundamentals that can survive through the good and bad times; Matthews Asia’s India strategy has a well-diversified portfolio.

Currie: The government has pledged a number of road developments and rail improvements. Do you see those sectors as good investments for the future, or is there another sector that looks good?

Asnani: There needs to be evidence that top-line growth translates to bottom-line growth over a period of time. I look for certain measures such as good net profit, capital investment, management along with a return on investment [ROI]. The ROI measure allows companies to understand the efficiency gains of their investments.

I noticed that many companies overbid for projects in many sectors and the result is lower cash and profits in the end. Road and rail developments are competitive markets, which result in lower prices over a period of time. Firms should look to diversify themselves so as to not compete only on price. Otherwise companies will not secure sustainable competitive advantage and will succumb to lower profits through intensified price competition.

Currie: The Reserve Bank of India recently cut interest rates by 25 basis points to 7.25% in June. Is there a particular sector that will reap the benefits of rate drops?

Asnani: Many sectors will stand to benefit from rate cuts such as real estate and durable goods (cars). Debt-ridden companies will also benefit as they will have to pay lower rates. However, minority shareholders may not necessarily benefit as many of these companies may not have pricing power to cope with the increased competition. Since the Reserve Bank of India has already indicated that rate cuts may be on its way, the market may have already priced it in. This means they have made the necessary trades to lower their risks making it hard to “split hairs” at this level.

Currie: India has been attaining a lot of foreign investment in fiscal year 2015. Does the influx of foreign institutional investment and portfolio flows make India a volatile market in the future?

Asnani: India’s market is volatile. At this time, about 20% of the stock market is currently owned by foreign investors because of the large sums of money that are invested in Indian companies. High volatility should be expected from the volume of foreign investment.

Investors who want to put their money in India need to embrace volatility. The best thing is to find good companies with strong fundamentals. If it is a turbulent time in the market, then the investor can buy the strong company on the dips at a lower price.

The views expressed in this article are the author’s own and do not necessarily reflect 51�Թ�’s editorial policy.

Photo Credit: ��/��

We bring you perspectives from around the world. Help us to inform��and��educate.���۴dzܰ�����is��tax-deductible. Join over 400 people to become��a donor or you could choose to be a��.

The post India’s Untapped Economic Potential appeared first on 51�Թ�.

Background

Some may argue that the Indian economy has been in the limelight for the past 20��years, but this time it seems to be different. India’s economy was liberalized in 1991 in the aftermath of the Soviet Union’s collapse. Soon after, it left behind the Hindu rate of growth.

However, India stumbled again under the previous government. The United Progressive Alliance (UPA), led by the Congress Party, was mired in corruption . Lower , coupled with a inflation rate, made life hell for the poor who suffered inordinately because they could barely afford to buy enough food to keep body and soul together.

Along with corruption, red tape and populism hobbled the economy during the last ten years. Unsurprisingly, India’s overwhelmingly young voters booted out the Nehru clan, India’s de facto royal family, out of power.

Indian voters have great hopes from incumbent Prime Minister Narendra Modi, who entered office in 2014. It remains to be seen if he can inaugurate a new era of economic growth and create the millions of jobs India urgently needs.

India has huge strengths. It has a growing middle-class, a young population and an entrepreneurial society. Yet it has massive weaknesses too. It has decrepit , rampant corruption, stifling red tape and obsolete colonial-era laws. Both Indians and foreigners are hoping that Modi can harness India’s strengths and overcome its weaknesses. On May 26, Modi completed one year in office and there is guarded optimism about the Indian economy.

In 2014-15, India’s gross domestic product (GDP) grew at 7.3% under the new that has been adopted to calculate GDP. The media termed this uptick in the “Modi effect,” and it is certainly true that Modi’s victory infused confidence in the economy. This optimism was not entirely misplaced. During his time as chief minister of Gujarat from 2001-14, the state grew at an of 10% per year. Now, Modi has to start delivering on his promise of development, jobs and growth.

Currently, the Indian economy has some tailwinds behind it. Foreign direct investment (FDI)�� by 27% to $30.9 billion in the fiscal year 2014-15. Foreign institutional investors another $17.9 billion into India’s stock markets. Raghuram Rajan, the head of the Reserve Bank of India (RBI), has been sagacious in his monetary policy choices. Under Rajan, the RBI has curbed inflation and has started interest rates this year.

Modi has begun certain flagship programs to also improve the life of the poorest Indians. The Pradhan Mantri Jan-Dhan Yojana��initiative��has aimed at the financial of millions. It made it as a Guinness World Record because of 18 million new bank accounts that were opened during August 23-29, 2014.

Despite the growth, Modi faces criticism. Many accuse him of failing to make tough decisions and attribute India’s economic growth to plain luck. Rahul Gandhi, the fourth-generation leader of the Congress Party, claims that Modi for the wealthy and not for the poor. Massive broke out when the government tried to push through the land acquisition bill. It aims to allow businesses in specific sectors to acquire land for critical development projects. Protesters are concerned that land owners will be unfairly displaced and provided inadequate compensation.

The environment is also a concern. in India is high and so is�� in major urban areas. A recent claimed that if air pollution were at levels permitted by legislation, then Indians on an average would live an extra 3.2 years.

Needless to say, inequity continues to be a concern in a historically stratified society. In particular, women face horrible . They still find it difficult to get and . and domestic abuse are common despite protest and .

Yet India has more women leaders than the US and has companies that are world beaters. Indian talent is making waves in space, software and the arts. Is the Indian elephant about to stride where Asian tigers have gone before?

Why is the Indian Economy��Relevant?

If India takes off, it will become the world’s biggest economy by 2030. India��is already the world’s biggest democracy. Its economic success will prove to the world that economy and economic dynamism are compatible. With its size and familiarity with the English language, India can be a bridge between dominant economies such as the US and the European Union and rising economies such as Bangladesh and Vietnam.

India’s economic story is relevant most of all to its own people. The hundreds of millions of malnourished and underemployed Indians have long yearned for a better life. Their hopes were dashed after independence but they have dared to dream again. India has not always been a poor country. As late as 1820, many that its share of the world GDP was around 20%.

Now, India is starting to dream of getting rich again. Even if the dream comes half true, a large part of humanity will escape penury to live with greater dignity.

The views expressed in this article are the author’s own and do not necessarily reflect 51�Թ�’s editorial policy.

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is experiencing an economic surge after Prime Minister entered office in 2014. Investors see India as a opportunity. Last year, capital expenditure projects $23 billion of foreign investment. Yet the country’s potential is clouded by environmental problems, which have been caused by pollution.

Water pollution has been in focus because of the . Air pollution is not featured as much as it should in the news, but noxious air is shortening the life expectancy of India’s citizens. The Environmental Protection Index (EPI) air quality ranking India at 174 out of 178 countries on the population’s exposure to particulate matter 2.5 (PM2.5). According to an in the Economic and Political Weekly, particulate matter comprises small particles suspended in the air with a concoction of “acids (sulphate and nitrates), ammonia, sodium chloride, black carbon, water, and mineral dust.” PM2.5 is particularly to health because it burrows deeper into the lungs and can cause pneumonia and cancer. Needless to say, this results in an unhealthier and less productive population apart from increasing pressure on an already overburdened health care system.

The World Health Organization’s (WHO) 2005 guidelines state that permissible exposure to PM2.5 should be an average of ten micrograms per cubic meter (μg/m³). The Central Pollution Control Board’s National Ambient Air Quality Standards (NAAQS) set the rate at an of 40μg/m³ per year. Around 660 million people in cities with PM2.5 higher than 40μg/m³ each year, the NAAQS standard. Over a billion people, around 99.5% of the Indian population, live in places with PM2.5 levels over the WHO’s more stringent guidelines.

Increasing air pollution is causing lower labor productivity. It is also damaging agriculture. Crop have been falling. Tourism is likely to be affected with India’s legendary smog causing increasing problems to foreign visitors. The poor suffer disproportionately from air pollution. Those who work in or live near factories, drive auto rickshaws and work as traffic policemen breathe noxious fumes on a daily basis. According to the abovementioned article in the Economic and Political Weekly, life expectancy for 660 million Indians could be by an average of 3.2 years if pollution was limited to NAAQS standards.

Balancing Growth and Environment

Modi’s government is trying to curb pollution. The prime minister recently launched the air quality that will cover ten major cities, including Delhi and Bangalore. The index will eventually cover 66 cities. It is a step in the right direction because you can only improve what you can measure. However, much more is needed to tackle the problem.

Ministers from Delhi, Haryana, Uttar Pradesh and Rajasthan have unveiled to curb pollution in a three month action plan. This includes the construction of demolition waste disposal plants in Delhi, more mechanical sweepers and extraction of oil from stubble that until now has been burnt. Sadly, these measures may only provide short-term reprieve. Less pollution is a much better way to improve air quality instead of trying to mitigate the effects of pollution.

Finance Minister Arun Jaitley has provided a budget that is ambivalent about the environment. He cut funding for the Ministry of Environment, Forests and Climate Change “22.6 billion Indian rupees ($360 million) to 16.8 billion rupees ($268 million).” The Ministry of New and Renewable Energy also saw its budget pared by two-thirds. At the same time, Jaitley promised an increase in coal tax and has allocated the proceeds to “the National Clean Energy Fund to boost the development of clean fuels and renewables.”

Generally, an economy with a higher GDP per capita becomes more conscious of the environment. Bruce Yandle, Maya Vijayaraghavan and Madhusudan Bhattarai provide an informational on the Environmental Kuznets Curve (EKC). An initial rise in GDP per capita results in environmental problems through higher air and water pollution. However, after a certain level of GDP per capita, environmental quality improves. Citizens start to worry about the environment after they are able to provide for their families. In economic terms, this results in an inverted U curve when pollution is plotted against GDP per capita.

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The EKC argument is more complicated as GDP per capita could be substituted for property rights. When there is rule of law and property rights are more secure, people do not allow pollution to dilute the value of their property. This might lead to better environmental protection. The authors making the EKC argument conclude that better governance, rule of law and well-functioning markets could curb environmental degradation.

As with all economic literature, the issue of time is critical. Citizens are affected by pollution as it happens. Short, medium and long-term policies take time to come into effect. Jaitley could increase spending on research and development of renewable energy or on improving India’s energy efficiency. Yet by the time his policies bear fruit, millions of Indians will have diseases or be dead. The key challenge for Modi and Jaitley is to ensure that India’s economic growth is not achieved at the cost of the environment and the health of Indian citizens.

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The financial crisis that crippled the US economy in 2007 shook the global landscape. The aftershock sent the markets into turmoil resulting in the Great Recession, which saw the US economy’s gross domestic product (GDP) by “5.1% from the fourth quarter of 2007 to the second quarter of 2009.” The crisis affected most people and it clearly showcased the frailties in the modern economic system.

With a bevy of news reports focusing on financial to corporate malfeasance, the paltry American personal savings rate was an afterthought. According to economists at Wells Fargo, the savings can be thought of as “personal saving as a share of after-tax income.”

Kevin Lansing, a macroeconomic researcher from the Federal Reserve Bank of San Francisco, that since 2000, the average personal savings rate was 1.9%, in comparison to 5.2% in the 1990s. Lansing explains that the sharp reversals in the savings rate during the 2000s could have been caused by the burgeoning rise in the stock market, along with housing prices. Consumers mistook the rise in their stocks and housing values as an increase in their savings, which eventually led them to spend and acquire debt.

The debt to personal income rose to a mammoth of 118% in 2005, which stressed household balance sheets. As the recession took hold, many consumers and private sector enterprises had to deleverage their debt, leading to a loss in demand and an increase in savings. The US economy tumbled and “ measures” were taken by the Federal Reserve to save the economy from collapse.

Recent Savings Rate

The savings rate has now jumped after the housing bubble rocked consumer finances. According to the Federal Reserve Bank of St. Louis’ Economic Data (FRED), the average personal savings in 2007 was 3%. However, in 2008, people started to save more to deleverage and pay off debts, which resulted in an average savings rate of 4.9%. From 2008-15, the average savings rate has been approximately 5.7%, with the highest reading of 10.5% in December 2012.

The latest reading on the personal savings rate in February 2015 came in at 5.8%. This is surprising for analysts, as it is the highest rate in more than two . Admittedly, there has been a string of disappointing news from the US economy such as poor job , along with a stronger dollar, which is hurting .

But even with the disruption caused by the Los Angeles port strikes, there has been good news with wage gains and lower oil prices. While the former has seen rather poor increases over the past couple of years, the statistic has by 2.1% from a year ago in March. Hence, the question of a rising personal savings rate needs to be answered, and its implications — if any — for the US economy must be analyzed.

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Reasons for Higher Personal Savings Rate

The long and brutal winter that pummeled the American northeast clearly affected consumer buying behavior. Even with personal rising by 0.4% in February, consumer spending barely budged as it grew by 0.1%. Harsh winters can dampen people’s appetite for and it could lead to a higher savings rate.

As the shortened spring leads to summer, there may be an increase in consumption due to pent up ; spending that is bound to increase after a period of saving and sluggish buying. The Consumer Confidence Index may reflect this buoyed outlook as it rose by 2.5 points in March. Mark Vitner and Michael Brown, economists at Wells Fargo, see the latest as a sign of better spending to come in spring.

The steep fall in Brent and WTI crude oil has pushed down gasoline prices. On April 7, 2015, nationwide gas prices were $2.38 nationwide, which is $1.20 less than a year ago. According to analysts at , Los Angeles may see gasoline prices “hover between $2.80 and $3.10 from May through August.” Lower gasoline prices should fuel demand as it is a tax for the middle-class. However, as aforementioned, the savings rate has risen as people are pocketing the rather than spending cash.

For consumers to start spending more, they will have to believe that gasoline prices will stay in the long-term. This is almost the same as tax cuts not leading to extra spending because people believe that taxes will rise again in the . In a recent survey from the Consumer Federation of America, consumers see gasoline prices rising by 50% to $3.20 in the next two . Consumers may be saving now in anticipation for higher gasoline prices in the future.

The Great Recession scarred the general populace as many people were left unemployed or stuck with lower wages. were greatly affected as they suffer from low starting salaries that could lead to lower income gains in the future. Even with a purring economy, recent graduates may find it tedious to switch jobs, considering the realities they faced during the financial crisis. No matter the recovery taking place, people were hurt by the recession, and this could lead to tepid recoveries along with slower spending and higher savings.

Negativity could be used to explain some of the risk aversion. This is when the brain is more sensitive to negative news than positive news. Indeed, the Great Recession brought a lot of unpleasantness over a long period of time. Consumers are attuned to the unpredictable future and they are taking the necessary action: saving more. This could explain the higher average savings rate from 2008 onward.

With a lot of debt taken prior to the popping of the housing bubble, private sector companies and individuals had to deleverage. Economist Richard Koo from Nomura Research Institute chalks this to balance sheet recessions. According to Koo, balance sheet lead to “minimizing debt instead of maximizing profits following the bursting of a nation-wide asset price bubble.” Japan was plagued by a balance sheet recession during the 1990s. ��The main problem stems from the deleveraging that takes place that causes income to be used to pay down debts. Presently, people may even use their incomes to pay down accumulated student loan debts; nonetheless, consumers want to bolster their balance sheet before increasing consumption.

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Implications of Higher Savings Rate

Income will be diverted away from consumption as people save their money and pay down their debts. Insightful by Charles Atkins and Susan Lund showcase that by keeping incomes constant and increasing the personal savings rate by 1%, this will cause a $100 billion fall in consumer spending. The researchers also mention that an increase in US incomes by 2% a year would allow households to reduce their debt-to-income ratio by 5% and have a personal savings rate of 2.3%. According to a New York Times , the average US consumer’s debt-to-income ratio peaked at 130% right before the recession. With an expectation of increased wages in the future, there will be more income to spend and save in the spring.

As per from Oxford Economics, higher savings can be channeled into the financial markets for more investment. This could lead to an increase in capital stock and innovation that could fuel economic growth in the future. Oxford Economics contends that “a higher level of household
and national — saving enables an increase in investment without a worsening of the US’s foreign borrowing position.” Without savings to fund a “healthy” 20-25% of GDP investment rate, there might be an increase in borrowing from foreign investors. Such borrowing could lead to overreliance on finicky foreign investment. Oxford Economics reports that the US personal savings rate needs to be maintained at 5-9% as the investment rate stood at 19% of GDP in 2013.

Even if an increase in personal savings can lead to higher investment, there must be demand for any expectation of investment. Researchers Jamee Moudud and Ajit Zacharias that “saving needed to finance investment comes mainly from retained earnings and not from household saving.” As a result, an increase in demand from consumers can lead to higher profitability for businesses — especially in a recovering economy — that should be the impetus for capital investment. A higher savings rate (or less government spending) may take away from the consumption required to fuel investment.

Finally, an increased personal savings rate to save or pay debts will improve consumers’ balance sheets, which might help people weather further economic storms. A sobering comes from Wells Fargo economists, who mention that “47 percent of the households save nothing out of current income.” This measure fell from almost 48% in 2010, but the high figure is a concern. It is also worrisome that 64% of the working populace has only three months of expense income if there was a problem with their main income.

Nick Bunker from The Washington Center for Equitable Growth because the savings rate differs at each level of the income distribution. It is no surprise that the top 1% was able to save on average 36% from 1986 to 2012. In fact, the bottom 90% averaged a negative savings rate from 1998-2008. This statistic should have increased after the Great Recession, but it showcases a dearth of savings for the most vulnerable.

The US personal savings rate has seen an uptick since the bursting of the housing bubble, but��it might start falling in the near future as balance sheets are repaired. An inequality of savings dampens the rosy picture of higher expected consumption in the future. It may not be a problem for US President Barack Obama at the moment, but it is something the next president may need to carefully analyze.

The views expressed in this article are the author’s own and do not necessarily reflect 51�Թ�’s editorial policy.

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Dominating the news headlines has been the US Federal Reserve’s (Fed) timeline for raising interest rates from the current range of 0% and 0.25%. The Federal Open Market Committee (FOMC), a branch of the Federal Reserve that is responsible for monetary , indicated in a March 18 that it would no longer be “patient.” This does not mean there will be any degree of impatience at this delicate time, but it does provide the institution with more room regarding the best moment to increase interest rates.

After the US economy added 295,000 in February, which reduced the unemployment rate to 5.5%, some analysts and economists were entertaining the idea that June would the month of interest rate . Whatever the case, the Fed has to keep in line with its dual mandate, which involves a 2% inflation rate while ensuring maximum employment. As for the latter, this is when the has employed as many people as possible, keeping a stable rate of inflation. Even though the Fed revised down the country’s projected gross domestic product (GDP) growth by 0.3% (2.3 to 2.7%) for 2015, it is likely that interest rate hikes will happen this year. However, with a number of complications taking place, it seems that the best time to increase rates might not be in June after all.

Strengthening Dollar

The US dollar has seen a stunning rise in comparison to other currencies as the global economy still teeters to some form of sustainable recovery. and the are slowly emerging from sluggish growth, while China aims to its economy toward domestic consumption. Since oil prices are denominated in dollars, the fall in Brent and WTI crude has led to an increase in the purchasing power of the US dollar. Finally, interest rate from emerging markets to the eurozone could lead to a depreciation of currencies as investors look elsewhere for higher yields.

As the dollar gets stronger, US exports will be dearer while imports into America will be cheaper. This will put pressure on US competitiveness and may increase the trade deficit. Sam Bullard and Sarah House, economists at Wells Fargo, that “excluding fuel, import prices fell 0.3 percent” in February. This drop in import prices may contribute to lower inflation, which rose 1.3% in January from the previous year. That was the 33^rd that the Fed did not hit the 2% inflation mark.

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The stronger dollar will also affect some businesses and could lead to a reduction in employment within these sectors. However, from Wells Fargo economists Jan Bryson, Tim Quinlan and Sarah House highlight that even though there was a “20 percent erosion in the price competitiveness of U.S. goods and services between early 1995 and late 2000, real exports of U.S. goods and services rose more than 40 percent during that period.” The analysts argue that global economic growth contributes more toward US export-led growth, which could quell fears on the adverse effects of the stronger US dollar.

The result of cuts in interest rates from other countries to spur growth may lead to a depreciation of their respective currencies. The US dollar will be stronger in comparison, and it will complicate matters for Fed Chairwoman Janet Yellen. But it should not be the only thing that she should be mindful about.

Slow Start to the Year

The past couple of months have been difficult for people all over the . The freezing weather encapsulated the American northeast and subdued consumer buying plans. Retail sales fell by 0.6% in February, which was the third month in a row for declines in the . Along with that sluggish statistic, there was a 2.5% decline in motor vehicles and parts from the previous month, which portrayed the adverse impact of weather on car-buying moods in the US. While the Fed will pay attention to a gamut of indicators, the central bank will look to see that these declines are a result of the weather.

In addition, the Los Angeles port strikes, along with lower oil prices, have likely affected business investment and sentiment, especially in the energy . While the reduction in capital investment from energy firms should not disrupt US growth in a massive way, it is still worth noting that there could be cutbacks within the energy sector. Even though this a difficult period for the energy sector, the FOMC March policy statement mentions that “business fixed investment is advancing.” Nonetheless, Wells Fargo economists revised down its US first quarter GDP forecast to 1.1% because of the events at the start of the year.

Thus, the economic weakness in some sectors should be transitory, but only time will tell about the spillover effects. Rather than increase interest rates in the June or July meetings, Atlanta Federal Reserve President Dennis Lockhart that the economy should show “accumulated progress.” Hence, a wait till September provides such a timeline to see progress.

Poor Inflation Readings

As aforementioned, the Fed has struggled to get the personal consumption expenditures (PCE) price index — the preferred inflation gauge for the Fed — to 2%. The Fed indicates in its policy that “inflation has declined further below the Committee’s longer-run objective, largely reflecting declines in energy prices.” Again, the importance of stable inflation at 2% cannot be overestimated as the economy will face immense problems at the hands of deflation.

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An increase in interest rates may lead to a slowdown in the economy and inflationary expectations. Since people may spend less with higher interest rates, there will be a slowdown in consumption-fueled inflation. The Fed must ensure that the economy can carry itself to achieve its goals of 2% inflation in the medium-term. If the Fed misinterprets the strength of the US economy, then inflation could fall back down, requiring low interest rates that will renew fears of a bubble in the economy.

Looking at the data, core PCE , which is a measure of inflation without taking into consideration food and energy prices, rose at 1.31% in January from a year ago. After taking into consideration food and energy prices, the PCE index rose only 0.2% in from a year prior. This is expected because of the fall in oil prices and its effect on other commodities as well. FOMC projections only see core PCE inflation at 1.3 to 1.4% this year, reaching 2% in 2017. With stubborn inflation readings, there needs to be a little more time to see whether inflation will remain at such levels for the near future.

With low gasoline prices and better weather conditions, people would spend their extra money. However, consumers are the extra cash from low gasoline prices, according to a Wells Fargo/Gallup survey. From the people questioned, 37% indicated that the money will be used to pay bills, while only 25% will go for “additional purchases.” If oil prices sustain their current lows and people are in a strong enough financial position, there could be a boost in consumption toward the end of 2015. The result could demand-pull inflation, but it could be slightly offset by the job losses in the energy . Nonetheless, the Fed should give itself that extra time to see if inflation is likely to rise to 2% in the medium-term.

Wage Growth

Struggling wage growth is a problem in the United States. If hourly wages rise by a higher percentage, this could spur inflation readings along with consumption. With consumption making up a strong percentage of the US economy, a break in the wage slump will lead to an improvement in the economy. Yet average hourly earnings for all private-sector production have consistently stayed at 2% since the recession .

Yellen would like to see an increase in the wage growth, but it may not be a precondition for increasing interest rates. With wage growth not breaching the slump for years, more time may be required to see if wage inflation can increase. Again, September provides the room for the Fed to be data dependent as the economy may add enough jobs and see a rise in wages.

Uncertainty From Abroad

From the eurozone to Japan, there seems to be a lot of uncertainty in global markets. While the Japanese government upgraded its view on its economy with an improvement in consumer , a virtuous is “far from assured.” Wages are stagnant, and saving rates are because of the growing cash reserves for businesses, which stand at around 40% of the stock market value.

Even the eurozone remains a mixed bag as Greece tries to present economic reforms and fight austerity measures. The country has promised to pay its creditors, but it has to meet economic reforms to obtain to the cash it needs. The European Central Bank’s policies to purchase sovereign bonds have depreciated the euro, which may result in a favorable environment to spur economic growth. Yet time will only tell if this will lead to a sustainable improvement.

While Yellen must focus her efforts on the US economy, she knows that shocks in other parts of the world may be felt in America. The summer may show whether the eurozone’s €60 billion a month purchasing of sovereign debt will lead to a significant recovery, and whether Abenomics will show sustained positive inflation and economic growth in Japan.

Time to be Data Dependent

Recently, Federal Reserve Vice Chair Stanley Fischer spoke about US monetary policy in New York, and he mentioned that increases in monetary policy should take place this year. He stated that “liftoff [or increases in interest rates] should occur when the expected return from raising the interest rate outweighs the expected costs of doing so.” Indeed, the Fed will consider a swath of data to ensure the US economy is on the right course for the future.

A subjective tool is the Fed’s dot , which shows what each FOMC policymaker believes interest rates should be at the end of the calendar year. While it would be difficult to forecast anything, it is interesting to see that most policymakers expect interest rates to increase in 2015.

The Fed must be careful not to increase rates too fast, so it does not shock the economy back into a recession. It is a tedious time for the Fed, and its data dependent role is a good one. The economy needs more time to strengthen. Patience is a virtue and runaway inflation does not seem to be too much of a concern at the moment. It is time to wait and increase rates later rather than sooner.

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