There’s a new Covid hotspot and we bring you the deets. Where? Here’s a hint: it’s at one of India’s premier business schools. Talk about (mis)management!
India’s provident fund has already seen a couple of amendments since the Budget was announced on 1 February. And the latest tweak favours government employees over private sector ones.
The future of protection against catastrophes like the pandemic could increasingly involve public-private partnerships. A volcano bond is the latest example.
Everyone wants the vaccine. So, the best way to do it is to put a brake on exports. It’s happening everywhere.
And going back to India’s premier business schools, have you listened to the latest episode of our podcast, Unofficial Sources, yet? It’s about the wicked problems they’re being forced to confront.
IIM-Indore’s exam fever
The second Covid wave is bad news for everyone. But especially for places of learning. We’re at the cusp of a new school year starting.
The online system, for all its sophistication, is juuuust not holding up. I’m not even talking about remote, low-resourced institutes. I’m talking about the Indian Institute of Management in the city of Indore.
The Ken has learnt that about 15 people on the IIM-I campus have tested positive for Covid. Another 40-50 are under quarantine. The trace-track-test process has been patchy at best, and students are now scared that more asymptomatic peers might be walking around, sharing food, rooms, bathrooms with them.
Is this an uncommon situation? Not really. Campuses across the country have opened and shut because of localised outbreaks. But at IIM-I, argue sources on campus, the outbreak could have been plainly avoided.
You see, sometime in January 2021, students were asked to come back to campus. One of the major reasons for this was that online exams were not working out. At all. IIM-I’s been using an online software to take exams, and long story short, it failed to stop widespread cheating. The institute had apparently asked parents to even set up mirrors in the room with the learning apparatus, to catch instances of cheating. Sure, mirrors are so hard to beat. Anyway, the parents weren’t too impressed.
(screengrab of email sent by a parent to the Institute)
This was January. Cut to late March, and sources tell The Ken that the institute isn’t giving out any information, other than students can leave as soon as they finish their exams. On campus.
“Why couldn’t these exams be converted to assignments?” asked one teacher, who spoke on the condition of anonymity. “ The authorities aren’t really talking. So students don’t know who to turn to. Last year, we couldn’t prepare. This time, it was a really predictable problem.”
The stringent rules on quarantining, on campus, have also deterred students from getting tested, even if they have symptoms. They just want to write their exams and get off the campus. The lack of communication from the authorities, say sources, has only intensified the pressure-cooker-like conditions.
As the second wave makes its way through India, larger institutes have to be geared up for more localised outbreaks if they are serious about getting students back on campus. And the least they can do is be prepared for round two.
Dampened hopes in the EPF
Hoping against hope
Many EPF hopes saw a crash
The change, limited in scope
Scuttled the expected bash
From Rs 2.5 lakh to 5 lakh
The FM raised the bar
But the kindness has a lack
Not all employees are at par
So, if your employer gives
To your EPF account
The 2.5 lakh limit lives
Taxing the interest fount
Last week, India’s Finance Minister Nirmala Sitharaman flattered to deceive.
An amendment eased a Budget 2021 provision on the employees’ provident fund (EPF) that had earlier caused much hand-wringing. But the relief was limited in its scope, and the joy fleeting for most.
The Budget, presented on 1 February, had some devils hidden in its details—as always. One of them said that, from April 2021, if your contribution as an employee to provident funds exceeds Rs 2.5 lakh a year (US$3,450), you will have to pay tax on the interest earned on the excess contribution. This was a blow to many, especially high-income earners. That’s because, so far, the interest on contribution to EPF was exempt from tax—without limits.
Employees generally contribute 12% of their Basic Salary (Basic) and Dearness Allowance (DA) each month to their EPF account, and employers make a matching contribution. The interest earned on these was fully exempt from tax, making it a nifty fixed-income investment. Not only was the interest rate on EPF higher than most other comparable instruments, it was also most tax-efficient. Some employees also use the voluntary provident fund (VPF) route to ramp up their EPF contribution—this allows them to invest big sums, over and above their usual 12% contribution; employers don’t contribute to VPF.
The government finally decided to plug this unlimited largesse in the recent Budget. It did this by taxing interest on employee contributions in excess of Rs 2.5 lakh a year to the EPF, whether by way of regular contribution or through the VPF.
This caused a hue and cry. A cap is justified, the nay-sayers agreed, but the limit of Rs 2.5 lakh was too low, they said. Many employees use the EPF to build their retirement nest, it was argued. The Finance Minister, while defending the provision, also hinted at the possibility of increasing the limit.
And she did increase the limit last week to Rs 5 lakh (US$6,900) a year in the amendments to the Budget. But there is a catch. The revised limit of Rs 5 lakh is applicable only in cases where the employer is not making any contribution to the provident fund. So, the higher limit benefit will apply only to a limited number of cases—essentially government employees who contribute to the general provident fund (GPF) or such, where the employer (the government) does not contribute. The government’s contribution, in these cases, goes to the pension fund of employees, says this report in the Economic Times.
In short, the Rs 2.5 lakh limit stays for all employees, including the private sector, whose employer also contributes to the EPF.
Now, this distinction seems unfair to employees in cases where the employer contributes to the EPF, but only a small amount. The law allows employees and employees to contribute just Rs 1,800 (US$25) a month to the EPF—assuming monthly Basic and DA of Rs 15,000 (US$207), even if the employee earns much more. Many employers do have such salary structures. In such cases, it may be just right to allow employees the higher limit of Rs 5 lakh, considering both employee and employer contributions.
But this will need another amendment. In the next Budget, maybe? Hope springs eternal in the employee’s heart.
The dystopian future involves financial gains from human suffering
Last week saw a new entrant into the bond markets—a volcano bond.
It’s part of what’s called catastrophe bonds or ‘CAT bonds’ if you prefer. They’re created to provide financial protection against natural disasters. A company (usually insurers) issues a CAT bond to investors, and promises to pay interest on the bonds regularly. If the disaster it’s trying to protect itself from unfolds, the issuer keeps the money and the investor loses the principal.
An example is a pandemic bond.
A concoction created by the World Bank in 2017, the US$320 million deal was meant to funnel private-sector money quickly to poor countries in cases of pandemics or epidemics—like Ebola. The idea was proposed immediately after an annual gathering of policymakers in Davos, Switzerland.
But according to Clare Wenham, assistant professor in global health policy at the London School of Economics, these bonds weren’t really on the side of global health security. Rather, it favoured private sector investors.
In July 2020, Financial Times reported that,
So, the payouts were delayed, and investors had already received a very high interest payout from the bonds.
The problem was stringent conditions that would trigger a payout were favourable to the private investors (the big institutions). You see the problem, and it’s quite typical of most things in finance.
Anyway, back to the volcano bonds or a ‘volcano parametric catastrophe bond’.
Its story of how “It All Started Around A Table In Zurich, Switzerland…” (another Swiss city) seems like it’s another bond to be circumspect about. And just like the pandemic bonds, this also is another public-private partnership. The public entity, in this case, is the Danish Red Cross.
You can expect the payout structure for this to be convoluted too. The private investors will obviously receive high returns for the risk they’re taking. And the triggers that force a payout could favour the private investors and significantly limit their losses.
The unfortunate part is that the future of catastrophe protection could move increasingly towards public-private partnerships as governments use this as their fail-safe, and focus their spending efforts elsewhere.
As Susan Erikson, a Professor of Global Health in the Faculty of Health Sciences at Simon Fraser University in Canada, wrote, “Let’s reckon with living in worlds where it may be necessary to translate the ethical obligation to help those who are suffering into financial devices that make people money, a trend we are clearly in the initial stages of.”
PS: The World Bank cancelled its plans for a second pandemic bond in 2020.
Before you start fulfilling orders overseas, you better fulfil the local orders first. This is what vaccine makers are discovering, as countries restrict exports in a bid to ensure that enough doses are secured for themselves.
The European Union is barring AstraZeneca from exporting its vaccine out of the EU until it can fulfil the bloc’s own orders. Things got desperate enough for the bloc to raid the pharma company’s Italian factory only to accept that the doses there were for distribution to customers including the EU. The US has also implemented something similar, cornering the market on locally manufactured vaccines, essentially restricting any export until the country has had its share. These moves leave countries with no domestic vaccine production at a disadvantage.
This could push a shift from relying on outsourced vaccine production in the future and bring it back domestically. Some countries like the UK and Australia have already started this process. In the future, it seems that onshoring will be the way to go for vaccine production, or risk being the last in line for a dose.
That’s a wrap for today.
Don’t forget to write in with your thoughts and observations on how this pandemic is reshaping businesses, societies, and economies. We will be back tomorrow.