NETFLIX: CAN IT CHILL IN INDIA?

BY SHUBHAM KUMAR

It isn’t a rare sight to come across a pop-cultured millennial frustrated over the absurdly plotted and forever running Indian TV shows, albeit at the same time aspiring for quality and indigenous entertainment content that can compete with the standards of international top grossers!

In July 2018, Netflix dropped its first Indian original, a gritty crime drama series ‘Sacred Games’. Saif Ali Khan and Nawazuddin Siddique starrer Sacred Games was the talk of the town in no time and some even hailed it as the ‘Indian Narcos’. It wasn’t for the first time that a finely plotted, exotic themed and a realistic movie/show was created in India, just that this was probably the first time such content gained mass popularity in India, as Indian movies and shows have the habit of sticking to the same theme again and again to fetch viewership.

Speculations were being made whether the video streaming service Netflix can challenge the status quo in India after its amazing success. Following the launch of Indian originals like ‘Sacred Games’, ‘Ghoul’ and ‘Lust Stories’, it saw a healthy boost in its viewer engagement, as in the Q3 of 2018 Netflix’s app downloads doubled from previous quarter while the downloads increased by a whopping 434% compared to same quarter last year.

Netflix saw its market share grow to 6.3 per cent till October from a mere 0.5 per cent as in the beginning of the year. After commencing its services in India in 2016, it was finally being considered a serious contender in the video streaming business.

What is Netflix?

Founded in 1997 as DVD Rental service, Netflix is presently a subscription-based streaming OTT service provider which offers online streaming of a library of films and television programs, including those produced in-house. After the availability of high bandwidth speeds and affordable internet costs in mid 2000s, Netflix expanded its business in 2007 with the introduction of streaming media while retaining the DVD and Blu-ray rental service.

The American company initially operated only in United States only, and it expanded its operations beyond the borders for the first time only in 2010 in Canada. Currently, Netflix operates in 190 countries.

India – A crucial battleground for Netflix

There is no denying that India holds a strong potential for streaming media players. The over-the-top (OTT) video streaming market in India is set to touch  $5 billion by 2023, according to a report by Boston Consulting Group (BCG). The expansion of the country’s online video base is likely to be driven by rising affluence, increase in data penetration in rural markets and adoption across demography like women and older. From regional content to international movies, online streaming services have been enabling the increasing youth population to explore new cultures through content.

Co-founder and CEO of Netflix, Reed Hastings stated that Netflix aims to grab its next 100 million subscribers from India, on his visit to India this year. Presently Netflix has nearly 137 million subscribers all over the world, while its rival Amazon Prime has about 100 million subscribers.

Netflix has already saturated its domestic market (almost half the households of United States have a Netflix membership) and now it is eyeing international markets. In the Q3 of 2018, Netflix added 5.9 million subscribers internationally compared to just 1.1 million subscribers domestically. While Netflix may be on fire overseas, India is still an untouched market.

The Competition

Netflix faces rigorous competition from Amazon Prime Video and Hotstar and about 30 Indian rivals, most of which provide popular sports and local-language general entertainment.

Los Gatos (California)-headquartered Netflix saw its market share grow to 6.3 per cent till October from a mere 0.5 per cent as in the beginning of the year while Amazon Prime Video’s share grew to 10.8 per cent from 4 per cent, according to KalaGato, a market intelligence firm. While Hotstar continues to be the leader in the OTT space in the country, the Star India-owned company’s market share has slid to 30.4 per cent as on October from 36 per cent at the start of the year.

In order to capture larger market share, Hotstar has acquired rights to popular movies and shows from HBO, Showtime, Disney and Fox in recent months.

Amazon Prime Video comes bundled with the company’s next-day delivery service and it has brought it huge number of users.

Netflix also signed up with Airtel, wherein the telecom operator gave a three-month subscription of Netflix with every Airtel post-paid connection.

Pricing Pressure

The downside of producing high-quality local content in India is that Netflix doesn’t have competitive pricing in the country. The service is currently available in India at a price of 500 rupees to 800 rupees depending on the subscription plan. This is significantly higher than Amazon Video’s 129 rupee per month plan and Hotstar’s 199 rupees per month plan.

Netflix chief executive Reed Hastings said that the streaming video company had no plans for cheaper prices in the hotly competitive India market. “Netflix does not have a pricing issue in India, otherwise everyone would be on the lower price plan”: CEO Reed Hastings

Netflix India subscription plan, which begins at a monthly price of Rs 500, is however cheaper than the US and UK but is expensive than Japan and Canada. Netflix India’s library of movies and shows is also not as extensive, according to a report.

Hastings acknowledged the limitations of the current pricing strategy in a country where per-capita income is a tenth of that in the United States. “It’s true that if you’re trying to get to a billion households, that probably wouldn’t work,” he said. “But if you’re focused on English-language, English-entertainment households, there is a much higher income.”

It would be interesting to watch how Netflix will capture a broader audience amidst discounted offers from rivals.

How can Netflix gain a stronghold in India?

Since Netflix is not keen on lowering its prices, it will continue with its strategy that has worked for it so far. The key points of this strategy being:

Original & Quality Content: With several players in the streaming industry, content is likely to be the key differentiator. Netflix has aggregated a diverse library of content that ranges from the third-party licensed movies and TV shows to its own collection of popular original content. The company has a long-term goal of ensuring that nearly 50% of the content streamed on its platform is original.

As part of its strategy to reduce its reliance on licensed video content, Netflix has increased its budget for original content to stay ahead of competitors. The company plans to spend as much as $8 billion on shows and movies in 2018, up from $6 billion earmarked for 2017.

Going Local is the key: Hotstar, Sony Liv, Voot, Jio TV and other rivals attract a major chunk of their members by providing them localised content. Netflix cannot ignore this segment of potential customers. Currently it’s producing original content in 17 different markets and it is also focused on adding more languages (including for subtitles), to convert customers preferring localized content.

Importantly, Netflix sees such content production as not just local-for-local, but also local-for-global. In other words, it aims to have content attract an audience not only locally, where it is produced, but also more widely. As such, Netflix potentially reaps the benefits of investing in local content all around the world.

Targeting Individuality: There is no one Netflix; rather, think of it as an expansive library with many small nooks and rooms. Most subscribers never wander floor to floor. Instead, they stay in the corner that matches their tastes.

Netflix relies on big data to predict its subscriber’s behaviour. By the virtue of internet distribution, Netflix gathers data about its subscriber’s consumption patter which it then uses to cultivate its library and suggest desired content to its users.

For example, Netflix created seven different trailers for its popular original series ‘House of Cards’. Some of these trailers were focused on politics while others on history or gender. Then, based on the user’s preferences and personal history, a different trailer was delivered.

Accessibility: Netflix has to recognize that in some parts of the world, particularly emerging and developing economies, mobile is the primary way most people access the internet. After the 4G burst in India last year, a major portion of Internet users in India access internet via their smartphones. Netflix also began placing a greater emphasis on improving its mobile experience, including sign-ups, credentials and authentication, the user interface, and streaming efficiency for cellular networks.

Creative Marketing: Netflix never fails to mark its presence online through its witty and hilarious comments over social media. They don’t rely on formal communication, rather they use a chill and conversational tone to connect with people over social media.

Also, Netflix closely follows what its fans are talking about. For example, once Netflix started selling Netflix socks based upon repeated complaints from users relating to socks while binge watching Netflix.

E-COMMERCE IN RURAL INDIA

BY RAHUL RANJAN & AMAN SRIVASTAVA

E-commerce has been a buzz word and has impacted urban lifestyle in a significant sense. But it is ‘alleged’ that the new king of commerce sector has not catered to the needs of the rural economy in India. The question is an important one and has raised many eyebrows, for the purpose might not have been served. So here we look whether urban markets are the only beneficiaries of e-commerce or it has served rural India more than what is visible.

E-commerce, also known as electronic commerce or internet commerce, refers to the buying and selling of goods or services using the internet, and the transfer of money and data to execute these transactions. E-commerce has been an area to which almost all of us, especially urban readers are acquainted with. It has really turned shopping and trading into a work of few seconds. It has helped us in many ways, provided an escape from the chaotic marketplaces, and paperwork has been reduced, but mostly in the urban segment, as it is usually claimed. However, if one has a look at the statistics, rural economy too has witnessed a positive trend in e-commerce growth index. It is important to know the strengths, weaknesses, opportunities and threats of e-commerce in rural India.

The biggest strength for e-commerce is the support from external institutions like government as well as third parties for effective delivery and penetration in rural areas. The trend of smartphones and internet culture give it a big boost. These externalities have surely been in its favour. Moreover, a recent shift in start-up orientation can be seen as a catalyst for e-commerce. Craftsbazaar is a key player in this regard.

The biggest weakness is a subset of its strength- lack of technological accessibility, resources and knowledge in rural households of the country. It is also important to note that lack of transportation and infrastructure amplifies the problem. The typical Indian family in a suburban or rural area gives more attention to the chances of faults or improper delivery than the services availed. This needs to be dealt with, through better planning and product delivery system as well as through improvement in infrastructure. The consumers must be confident about the security and effectiveness of e-commerce. Illiteracy is also a major factor here; the use of e-commerce requires internet and/or electronic usage, which is not very easy for a person who is uncomfortable with new gadgets.

In rural India, as well as the tier 3 cities, the biggest threat for e-commerce development is fear from cyber security issues and lack of awareness on the same. Also, the habits of the people take time to change, as they still prefer personalized shopping experience to any benefit accruing from online delivery system. As Rahul Sachitanand wrote in his article for the Economic Times, complaints are threatening to dampen hopes of aggregators in India, with a decrease in overall fund flow, from number of rounds to the total investment.

Taking all this into account, development of e-commerce in rural India must be focussed on. Opportunities must be converted into positive results. These include the scale of growth and development possible, as rural households are relatively untapped, having great potential going forward. Moreover, the advent of postal services digitization can speed it up. We can follow the examples of other countries including China, as discussed later in the article. We must also remember that rural households generally purchase essential items resulting in less chance of return; this is of great relevance for the e-commerce giants. One should note that the problem herein is much more about real delivery instead of awareness at large. Now a lot of rural households know about e-commerce and are willing to support its development if they get satisfactory services.

In the past couple of years, many e-commerce start-ups have emerged that are solely focusing on rural areas; to name a few: Inthree, Storeking, ipay, and edabba. It shows that current generation of aspiring entrepreneurs recognizes the untapped potential in rural market. And collectively these start-ups are also spreading awareness in the rural population about the benefits of online shopping. The e-commerce and online market place in India are seeing lucrative opportunities coming from the rural areas following the Union budget’s focus to boost rural economy and promote digital transactions. The biggest thrust for e-commerce will come from two key budget initiatives- target to connect more than 1.5 lakh gram panchayats with high speed brand and focus on digital transactions through merchant enabled Aadhar payments and BHIM. Many sectors have benefited from the increased rural demand as a result of agriculture reforms and MGNREGA. “Now with the increased penetration of smart phones and internet, we expect a large base of first time online consumers to come from rural areas this year”, said Sujayath Ali, co- founder of Fashion e-commerce player Voonik.com.

Government’s policies to smoothen things up: Start-up India & Digital India Initiatives

With the initiative ‘Start-up India’, the present Government of India has made it considerably easier for new start-ups (local & foreign alike) to establish themselves in the country. The whole Indian start-up ecosystem has received a boost from such policies, which is expected to improve e-commerce’s state in rural India in the coming time. The present state of e-commerce in India is similar to what China experienced a few years ago. So, it would be a good approach for start-ups to look up how Chinese e-commerce companies overcame challenges to serve their rural population better.

It is also important to know how postal service is impacts e-commerce in villages. It has the power to reach each and every corner, has a massive reach to the remotest of locations. It has started to adapt with the changing times- in the last 24 months it has collaborated with more than 400 e-commerce websites, including the giants like Amazon and Flipkart. Today more than 1, 55, 000 post offices of remote areas have updated themselves to connect among themselves and with e-commerce companies to deliver goods to the customer. So, inclusion of postal services is a win-win situation for all three stakeholders in the case- the government, e-commerce companies and the consumers. Collaboration with e-commerce has made the government owned logistics channel in postal services go digital in full force. For the second stakeholder, i.e. the e-commerce company, the help from postal services has made the process easier especially in tier 3 cities and villages. E-commerce stores now have their own delivery system for such locations or else they are taking help from third parties like postal banks and other small agencies. The third stakeholder is every consumer who is now availing the benefits of e-commerce which were not accessible before. The villagers are able to get doorstep delivery and various discounts. India is world’s fastest developing economy but there is an economy which is much more developed and still growing at a great pace, China. There is much to learn from China in the ideation and implementation of e-commerce plans.

Chinese e-commerce sector has escaped from the hurdles of delivery system implementation. Take the case of JD.com which has transformed Chinese markets by including drones in the delivery system to cut down half of its delivery expenses over next several years. China has fought against delivery challenges well practically. This has also boosted employment in Chinese rural provinces.

E-commerce has emerged as a game changing platform for both consumers and producers. Being a country with 70% of its population residing in rural areas, India provides a great opportunity to these companies to utilize the potential. Internet and postal services act as a catalyst in this phenomenon. However, there is still large scope for development as only 20% of rural population has access to internet. The prime aim should be to increase the internet users in such areas and also to consider China’s model if the government and e-commerce companies want to further increase customer base in rural India.

E-commerce has strongly been linked with digitization and development over the years. One must not forget that it is a no loss situation for both consumers with higher quality at lower prices at doorsteps as well as producers with great market potential with few intermediaries. Challenges are many but the positive trends are also emerging. The days seem bright for rural households in the future.

USMCA REPLACING NAFTA

BY HARSHITA BURAD

 

US President Donald Trump, on the campaign trail, labelled NAFTA as “the worst trade deal” ever signed by the US.

Why did he say so? Why is he so keen to get it withdrawn? Is really the NAFTA to be blamed? Have you heard about the USMCA taking over NAFTA? This article will provide you an insight into this ‘Game of Trade’ deals.

Free Trade Agreements are basically treaties between two or more countries which are designed to reduce or eliminate certain barriers to trade and investment between the countries. They aim to provide a better platform for the countries to boost trade and improve commercial ties between them.

Trade barriers typically come in the form of tariffs and trade quotas. Lowering trade barriers helps industries access new markets, boosting their reach and the number of people they can sell their products to. They provide a big advantage to the consumers in the form of greater variety and large number of choices.

NAFTA:

Now taking into consideration the very famous FTA: The NAFTA. The North American Free Trade Agreement (NAFTA) came into effect on January 1,1994. It is a treaty between the three superpowers of North America: Mexico, Canada and the United States and is thus the largest Free Trade agreement in the world. It finds its source from the agreement between Canada and USA in 1988.

Canadian Prime Minister Mulroney had agreed with President Ronald Reagan to begin negotiations for the Canada-U.S. Free Trade Agreement. It was signed in 1988 and went into effect 1989.

Regan’s successor, President H.W. Bush, began negotiations with Mexican President Salinas for a trade agreement between these two countries. In 1991, Canada requested a common agreement between all the three countries, which eventually led to NAFTA.

The major objectives as stated in the Article 102 of the agreement include: ‘Eliminating barriers to trade and facilitate the cross-border movement of goods and services, promote conditions of fair competition, increase in investment opportunities, create procedures for the resolution of trade disputes, establish a framework for further trilateral, regional, and multilateral cooperation to expand the trade agreement’s benefits.’

It had a lot of positive impacts which led economic boosts in the three countries.

Firstly, between 1993 and 2017, trade between the three members increased from $297 billion to $1.17 trillion. That boosted economic growth, profits, and jobs for all three countries. Talking about U.S specifically, its exports increased by 33%. It included exports of motor vehicles and its parts, computer equipment, petroleum and coal products. Also 26% of U.S. imports were from Mexico and Canada. Lower taxes also reduced import prices. U.S. grocery prices would be higher without tariff-free imports from Mexico. That’s especially important for oil prices since America’s largest import is oil. Imported oil from both Canada and Mexico has prevented higher gas prices. Secondly, NAFTA exports created 5 million new jobs, the most being created in manufacturing sector. Since NAFTA was enacted, U.S. foreign direct investment in Canada and Mexico has more than tripled. Canadian and Mexican FDI in the United States grew to $240.2 billion, up from $219.2 billion in 2007.

Though these figures may seem to prove that the NAFTA made the three economies better off, the agreement had major setbacks.

Around 1.43 million farm jobs were lost when NAFTA took effect. When the 2002 Farm Bill was passed, it subsidized American agribusiness by as much as 40 percent of net income. Then NAFTA removed the tariffs, which has cost Mexico to export corn and other grains that were much cheaper, and Mexican farmers were not able to compete. Because NAFTA threatened the farmers in Mexico, they had to be more competitive, pushing them to use more fertilizers and other chemicals, thus causing intensive pollution and environment deterioration.

US-owned companies took in Mexican workers near the border to assemble products for export to the US at a very minimal wage. However, these workers were not given labor rights or health benefits. On top of that, they were made to work for more than 12 hours a day.

Also, it allowed the countries to safeguard their intellectual property.

Lately President Donald Trump wasn’t really in favour of the NAFTA and thus he wanted to renegotiate or completely withdraw NAFTA. This was due to some reasons. A lot of U.S. jobs were lost. Labour in Mexico is cheaper than that in the States. Thus, many manufacturing industries withdrew part of their production from the high-costed United States and moved jobs to lower-cost Mexico. The manufacturers that remained in America lowered their wages to compete in those industries. Between 1994 and 2010, the U.S. trade deficits with Mexico totalled $97.2 billion, displacing 682,900 U.S. jobs. Nearly 80% of the losses were in manufacturing.

For companies that didn’t move to Mexico, they used the threat of moving to suppress people’s wages. They gave those who organized unions a choice between joining such organized drives or losing their jobs. Of course workers chose their jobs without union support. As a result, they had little to no bargaining power when it comes to wage increase.

USMCA:

Thus, after outrage by some communities in the three countries, a round of renegotiations took place and gave place to the United States–Mexico–Canada Agreement (USMCA). It was informally agreed upon on 30th September and formally on 1st October, 2018. The agreement has been officially decided and agreed upon but signature and implementation is pending.

The three countries reached a consensus after more than a year of talks, which began after Donald Trump in his campaign promised to renegotiate the decades old NAFTA agreement. Although the talks have been done, the real question is whether it is ratified by the counties, especially USA, which has elections in 2019.

It’s basically a new version of NAFTA itself, with some major changes and new policies on labor and environmental standards, intellectual property protections, and some digital trade provisions.

Let’s compare NAFTA and USMCA and try to understand how the latter improves the situation.

1.Automobiles and Wages-

• USMCA: It has the Country of Origin rules which states automobiles must have 75 percent of their components manufactured in Mexico, the US, or Canada to qualify for zero tariffs. It also requires at least 40 percent of that come from factories where the average wage is $16/hour.
• NAFTA: It currently requires that 62.5 percent of automobiles, be produced in the trade zone. There’s no minimum-wage requirement.

2.Dairy-

• USMCA: US farmers get more access to the Canadian dairy market: The US got Canada to open up its dairy market to US farmers, which was a big issue for Trump.
• NAFTA: Dairy wasn’t part of the original deal. The U.S. has long complained that Canada’s system of domestic quotas protects its dairy farmers from foreign competition.

3.Intellectual property and digital trade-

• USMCA: The deal extends the terms of copyright to 70 years. It also extends the period that a pharmaceutical drug can be protected from generic competition.
• NAFTA: The term of copyright is 50 years in the agreement.

4.Currency-

• USMCA: The new deal includes a new currency chapter that commits the three countries to maintain market-determined exchange rates and refrain from competitive devaluations of their currencies. The pledge won’t have much effect on policymaking in the three nations, all of which have free-floating exchange rates. But it could serve as a template for future trade deals, giving the U.S. leverage over countries such as China.
• NAFTA: It doesn’t include a currency chapter. Automakers and some lawmakers have been calling for one as a way to shield against currency manipulation.

5.Sunset Clause-

• USMCA: The U.S. had demanded a sunset clause that would kill NAFTA after five years unless the countries agreed to extend it. In the end, the countries settled on a 16-year term for the deal, with a review to identify and fix problems and a chance of a deal extension after six years.
• NAFTA: There is no automatic sunset clause under the current NAFTA. But any of the three partners can withdraw from the agreement on six months’ notice.

The new agreement also includes new provisions to deal with the digital economy, including prohibiting duties on things like music and e-books, and protections for internet companies.

As said earlier, the new deal sounds perfect but ratification is still pending. For example, in the United States, the agreement must be sent to Congress for a 60-day review period, during which Congress can suggest changes, before it can be signed by the US president. Similarly, in Canada, the agreement must be tabled in Parliament, where it can be debated, before ratification is possible. Though it surely does have the ability to cover up the loopholes of NAFTA and bring together the three big economies, there still remains a question mark wandering over the agreement about what final form it would take after deliberations happening within the three countries. Let’s wait to see if Trump’s ‘historic achievement’ comes out to be the same.

THE LAMPPOST THEORY

BY SRISHTI AGRAWAL

“If only”. When speaking about politicians, economists invariably turn to their patent phrase – “If only”. The tussle between economics and politics is as old as the disciplines themselves, and as constant as their existence. While speaking about the relationship between these two, Princeton economist Alan Blinder coined the phenomenon of ‘The Lamppost Theory’, as explained in his own words, “Politicians use economics the way a drunk uses a lamppost- for support, not for illumination”.

It is hardly shocking to see politicians overpowering economists in a democracy. While economists may develop the best courses of actions and make the most accurate predictions, it is finally in the hands of our elected representatives to actually formulate policy. It is this division of roles that leads to friction between these two factions. It’s almost as if they come from two different civilizations, based on two entirely different schools of thought. Economists rely on the theoretical mathematical logic taught in school, based generally on certain assumptions that at times do not match the real world implementation concerns. Politicians, on the other hand, have their own logic, it’s just political logic.

Politics isn’t only about taking the most cost-effective decisions, rather it is about the public, the voters. It’s necessary for politicians to take decisions that appease the masses and solicit support because they are ‘of the people, by the people and for the people’. And at times public welfare requires them to go against the orthodox ‘rational’ measures.

Take for example the 2017 Tax Cuts by Donald Trump, that he never bothered to make up for, which was swiftly followed by increased public spending by hundreds of billions of dollars. The US economy was in no need of this stimulus at the time, so what was the reason? Simple: people love tax cuts and Donald Trump wanted a boost in his local popularity ratings.

Whether it be the non-imposition of carbon and traffic taxes despite them being touted as the most effective measures to solve their respective problems or the clear populism in providing gas subsidies costing about 53,000 Crore INR, these actions are based on the unequivocal belief ‘Good economics is bad politics’. Even the introduction of Ayushman Bharat by the current regime, costing 5000 Crore INR this year, with the government paying the entire premium to cover about 8 Crore beneficiaries, instead of a part payment system despite the ballooning fiscal deficit shows the extent politicians do and can go to for public welfare, culminating eventually into votes.

But before criticizing our politicians, as is the general norm, on taking a closer look, one might find that it’s not only politicians who ignore the cost benefit analysis in favour of following their instincts. In the real world of biases and inclinations, the basic assumption of ‘a rational consumer’ flies in the face of the traditional economic theory. Humans are in fact emotional beings and unsurprisingly so, go against the perceived reason and logic.

In fact, Harvard psychologist Gerd Gigernzer believes that gut feeling is actually based “on lots of experience, an unconscious form of intelligence” that in some cases might prove to be superior to analysis. He even claims to have interacted with large international companies, who admit to basing 50% of all their decisions on gut feeling. In fact, the power of instinct has been seen time and again, with Calpurnia in 44 B.C.E., Julius Caesar’s wife, trying and failing to convince him to not go for a senate meeting because she had ‘a bad feeling’ that something might befall him, and he was actually assassinated that very day or Aileen Mahoney, director of Evotive Marketing going against her usual custom to follow her instinct and returning a missed call, which scored her one of her biggest clients.

I believe that in order to succeed one must move forward with a mix of both, instinct and analysis; just like an economy needs a balance of both- Politics and Economics. Politicians have time and again come under the fire for already deciding on a path and then seeking an economist to bless it. But it has been observed numerous times in business and in the ordinary course of life that people follow their hunches first and then seek the information or data to justify it. It is imperative for politicians to become more perceptive to the economic logic and rationale while economists must adapt a more political savvy and practical outlook, reconciling with political logic. They must accommodate one simple factor in their calculations that politicians too are, in the end, only human.

MONEY LAUNDERING

BY TUSHAR BAGRODIA

Many of us have seen the way Skyler White launders money earned from Walter White’s drug empire by buying a car wash in “Breaking Bad”. What exactly is money laundering and why is it important from an economy’s point of view to evolve stringent laws against it? Money laundering is the concealment of profits accruing from illegal activities and corruption into “legitimate” assets. Criminal activities result in the creation of unaccounted money. This can raise the suspicion of law enforcement agencies. Certain strategies are evolved to enable the safe use of these proceeds without raising suspicion. The implementation of such strategies is called money laundering. Laundered or “cleaned” money can then be used for accumulation of wealth or simply spent. Money laundering is also associated with other forms of financial and business crime and can include misuse of securities, currencies, etc. for terrorism financing and evasion of international sanctions.

Money laundering is carried out in three stages:

1. Placement: The person places his money in the bank in the form of cash. This is the riskiest stage as banks are required to report high value transactions. The money is usually broken into smaller sums and then placed in multiple bank accounts. Placement can also be done through gambling, loan repayment, etc.

2. Layering: This is the stage following the placement stage. It is often called structuring. At this stage, money is transferred into various overseas anonymous bank accounts in countries where banks have secrecy codes. The money is divided into investments constantly moving to elude detection. Loopholes are exploited and discrepancies in legislation are taken advantage of to separate the illicit money from its source.

3. Integration: This is the final stage of money laundering. Money is returned to the money launderer from what seems to be a legitimate source. Having been placed initially as cash and layered through a number of financial transactions, the criminal proceeds are now fully integrated into the financial system and can be used for any purpose. The purchases of property, art work, jewellery or high-end automobiles are common ways for the launderer to enjoy illegal profits without necessarily drawing attention to themselves.

Shell companies and tax havens play an important role in this process.

A shell company is a company without active business operations or significant assets. They are created with the specific purpose of diverting or laundering money. Most shell companies do not manufacture or deal in any product. They are mostly used to make financial transactions. Generally, these companies hold assets only on paper and not in reality. These companies conduct almost no economic activity.

A tax haven is a country that offers foreigners little or no tax liability in a politically and economically stable environment. They make great avenues for illicit money.

A few cases of money laundering have been discussed below:

1. Bank of Credit and Commerce International (BCCI): From the mid-1980s, BCCI and its customers were apparently committing fraud and money laundering across the world, for an estimated value of £17.6 billion. BCCI gained a reputation as a banker to arms smugglers, drug cartels and dictators. It even had relationships with officials in multiple countries from Argentina to Zimbabwe which ranged from questionable to fully corrupt. In 1988, a US Senate sub-committee was appointed to investigate claims that BCCI was involved in money laundering. In 1990, the bank pleaded guilty to money laundering and was fined £11.3 million. BCCI was shut down soon after whilst still owing over £10 billion to its creditors. BCCI mainly used shell companies and secrecy havens to launder money.

2. The Hongkong and Shanghai Banking Corporation (HSBC): The US Senate alleged that HSBC had:

supplied banking services and American dollars to some banks in Saudi Arabia in spite of their connections to terrorist financing

dodged restrictions created to prevent transactions involving Iran, North Korea and other countries subject to international sanctions

HSBC US didn’t treat its Mexican counterpart as high risk even though it has a problem with drug trafficking and money laundering.

This led to laundering of an estimated £5.57 billion. HSBC had to enter into a five-year deferred prosecution agreement.

3. Nauru: Nauru is a phosphate rock island northeast of Australia. When the phosphate reserves were depleted, the island turned to offshore banking, leading to involvement in the ‘no questions asked’ registration of offshore financial institutions. This made it a tax haven in 1993. In 1998, Russian criminals laundered an estimated £53.7 billion through shell banks in Nauru. Banks in Nauru weren’t required to verify the identities of its customers or question where deposited money came from. Since 2001, Nauru has attempted to clean up its act and has accepted aid from Australia in exchange for hosting a detention centre for asylum seekers that were trying to enter Australia illegally.

4. Standard Chartered: In 2012, the British bank Standard Chartered was accused, by New York’s Department of Financial Services (DFS), of helping the Iranian government to circumvent US money laundering regulations to the tune of an estimated £191.8 billion over 10 years. The bank was made to pay £262 million in 2012 by the DFS and the US Department of Justice for failing in its anti-money laundering measures and for violating US sanctions on Iran, Burma, Libya and Sudan. Subsequently, a further £232 million had to be paid in civil penalties in 2014.

Investopedia describes Anti Money Laundering (AML) as “a set of procedures, laws and regulations designed to stop the practice of generating income through illegal actions.” For example, AML regulations require institutions issuing credit or allowing customers to open accounts to complete due-diligence procedures to ensure they are not aiding in money-laundering activities. The onus to perform these procedures is on the institutions, not on the criminals or the government. India became the 34^th country member of the Financial Action Task Force in 2010. India is also a signatory to various United Nations Conventions which deal with anti-money laundering and combating financing of terrorism. India has criminalised money laundering under both the Prevention of Money Laundering Act, 2002 and the Narcotic Drugs and Psychotropic Substances Act, 1985 as amended in 2001. The Prevention of Money Laundering Act, 2002 levies a fine up to Rupees five lakhs. The Bill proposes to remove this upper limit of fine. In the 1980s, the war on drugs forced governments to resort to money-laundering rules to seize proceeds of drug crimes in order to catch individuals running drug empires.

Thus, we see how money laundering is a big problem for an economy and must be combated with stringent laws and commitment. Billions of dollars are laundered every year and this also reduces the autonomy of the government as drug lords and criminals grow in power. Although measures have been taken to put a check on such activities, further action and active involvement of government authorities are required to build a fool-proof AML system.

ROUND TABLE CONFERENCE: REPORT

‘SHOULD INDIA IMPOSE TARIFFS ON THE UNITED STATES OF AMERICA?’

BY AMAN SRIVASTAVA, ARADHANA PANDEY & DAYA NARAYAN

Overview:

On 12^th October, The Commerce Society of Shri Ram College of Commerce organized a Round Table Conference for its members on the much-debated topic, ‘Should India impose tariffs on the United States of America?’ The participants represented various stakeholders, namely- The Ministry of External Affairs of India, The World Trade Organization, China, Pakistan, Russia, World Bank, The Ministry of Commerce and Industry of India, The Associated Chambers of Commerce and Industry of India, The Reserve Bank of India and The International Trade Association of The United States of America.

Setting the wheels of the RTC in motion:

The RTC began with the stakeholders giving a brief description of their individual stand and perspective on the issue at hand. While most of them were opposed to the proposal, three stakeholders, namely- China, Russia and the Reserve Bank of India were in favour of India imposing higher tariffs on US goods. Stakeholders who stood strongly against the motion included- WTO, World Bank, Pakistan, the Ministry of External Affairs, the Ministry of Commerce and Industry, ASSOCHAM and the ITA, USA.

Opinion of Indian Stakeholders:

While the Ministry of External Affairs, Ministry of Commerce and Industry and ASSOCHAM were against the imposition of tariffs on the USA, the RBI supported the same. The opposing members mainly argued on the grounds that the said policy’s implementation would harm foreign trade and worsen India’s position at WTO; and on the possibility of worsening relations between the two countries. They were firm on their stand that India, being in a favourable position in their bilateral trade (trade surplus) with the USA, should work on maintaining good relations with the latter, keeping in mind the possible waiver that it might receive from the Countering America’s Adversaries through Sanctions Act (CAATSA) as well as the Indo-Russian deals. They also pointed the out that imposition of tariffs will invite uncalled retaliation from USA that can drive India into a trade war and increase Current Account Deficits, thereby affecting India’s GDP.

However, The Reserve Bank of India, surprisingly against the other Ministries, argued that higher tariffs on US goods can strengthen rupee, and brought the factor of employment in the picture. When the house asked the RBI to justify its assertions, its reply was wobbly. As it failed to provide valid reasoning, its stance was not bought by the other members of the house.

Stands of the Other Nations:

Of the three nations present in the house, namely- China, Russia and Pakistan, only Pakistan was opposed to the imposition of tariffs. Both, China and Russia saw the golden opportunity to get on the same page with India in the global market by supporting the prospective imposition of tariffs, thereby ending USA’s unilateral dominance in the global economy. While China’s statements showed how the Dragon sees Indian markets as a golden land to cash-in, Russia saw this as an opportunity to defeat the purpose of USA. Though the countries refused to acknowledge that their arguments were pointing towards a trade war in near future, their words imply otherwise.

Quenching everyone’s curiosity, Pakistan, the country which has been labelled as ‘China’s puppet nation’ and as ‘India’s Nemesis’, argued against the imposition of tariffs on the grounds of humanity as it held the view that no trade war can be good. Pakistan also implied that India cannot afford to have a stance against the United States at present when India’s geo-political stand in South- East Asia is over-powered by the alliance of China and Pakistan.

Views of the International Organizations:

The two-international institutions present at the RTC- The World Trade Organization and The World Bank, were against the imposition of higher tariffs on US goods by India. In support of its primary objective i.e. promotion of liberal trade and prevention of global trade war, the WTO stood against the tariff imposition and brought into light the benefits of the ‘Most Favoured Nation’ tag given under the umbrella of WTO, which would be lost by India as a consequence of the tariff.  The World Bank argued that India, which is currently sitting in a favourable position in the Indo-US trade would only invite retaliation from USA with such tariffs, which may lead to inflationary trends in the fastest developing economy of the world, which would hamper its growth drastically. Both the organizations wholeheartedly supported working out any other alternatives or negotiations for maintaining smooth ties with the US.

Stand of The Nation in Question- The United States of America:

Finally opined in, The International Trade Association of the USA, which, as expected was against the imposition of tariffs on goods produced by their nation. It argued that higher tariffs on US goods would create a trade imbalance, severe Indo-US relations due to retaliations that would thereby lead to the flooding of Indian markets by China. It pointed out how India was struggling to manage the consequences of US’s tariffs which was a retaliation to India’s imposition of 100% tariff on Harley Davidson. It also said that their imposition of tariffs was a ‘Protective method’ aimed at the growth of domestic industries and markets, and definitely not an attempt to curb the growth of the Indian economy. They called Russia and China’s stand on the matter as an act of egoism and as one aimed at over-powering other nations.

The Question & Answer Session:

Then came the question & answer session where members of the International Press and the stakeholders questioned and demanded clarifications from each other. The first stakeholder to be questioned by the house was RBI, which was clearly under-prepared and slimed away with vague answers. China went ahead to respond to the accusation made by the USA, stating that they can’t control the willingness of Indian consumers to buy Chinese products and the subsequent ‘flooding of Indian markets by Chinese goods.’ China was thereafter asked to guarantee its stance of supporting India when Indo-China history surely points out its hypocritical behaviour. China, however, let the question go unanswered. The members of the International Press questioned Pakistan whether its stand was an attempt to receive a green-signal for International Monetary Fund’s assistance, to which it replied by calling its view as one aimed at benefiting India and the world at large. However, it went on to make a controversial remark by calling WTO and India ‘puppets’ of the USA. The USA too, was questioned on its stand against tariffs when USA was the one to start this cycle at the first place. It replied by stating that US has always believed in ‘protectionism’. However, it invited retaliation from the house when it commented about the flooding of US employment markets by Indian job-seekers.

Conclusion

The RTC brought into view the economic, political and personal interests of the various stakeholders. The views of China, Russia and Pakistan lead us to believe in the existence of individual ulterior motives with China and Russia’s stand displaying the want of the two giants to capture Indian markets and set ablaze the downfall of world’s largest superpower, and Pakistan’s stand to remain in the good books of the world at large. The stand of international organizations was diplomatic at large, while the opinion of Indian stakeholders presented their need to protect the country’s economy. USA’s stand was fairly justified but somewhere the question of hypocrisy still persists. In a nutshell, the Round Table Conference was bent in favour of free trade and against any prospective imposition of tariffs by India on United States of America.