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The Nutgraf : Money, Power and Mystery


It’s been some week. So many things have happened—all of which are important. So, instead of doing one big story, followed by a couple of snippets, I have decided to do a different Nutgraf this week. This is an anthology, not a movie. 

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Let’s dive in. 

The one good thing about the Union Budget

In case you missed it, last Saturday, the Finance Minister, Nirmala Sitharaman, presented the Union Budget of India.

I wrote last week that the Budget has devolved to an exercise much like Apple’s annual event—the performance and the ritual supersedes the substance, and the ones who are supposed to tell us if it’s good or bad are also a part of the performance. Oh, and every year is the best Budget ever

A large part of what happened last week was exactly as I predicted, but with some notable exceptions. For the first time since I remember, there was a touch of…disappointment?

There are a lot of articles, but the one by Debashis Basu, editor of, deserves to be quoted, just for its opening two paragraphs

Until Saturday, there seemed to be a consensus among businessmen and financial sector experts that this Union Budget will do something truly innovative and big to put India on the growth path. Riding on this sentiment, the Sensex soared from around 38,000 in October to an all-time high of over 42,000 in the third week of January. The consensus of hope was best captured in a note I received from a business consultant two days before the Budget: “2020 will be remembered for many years for the way things changed quite abruptly in India. That tipping point could be the annual Budget on February 1.” Fund manager Akash Prakash wrote in this newspaper that the “expectations (were) for something more radical, something truly reformist …”

After more than two and a half hours of a tortuous exercise in minor rearranging of the pieces of a complex economic chessboard, which passed for the Budget, the Sensex tanked by almost 1,000 points. While I don’t take the market’s instant verdict on everything as the final truth, it certainly proved the point I am making: The massive disappointment over the failure to deliver something momentous to stimulate growth through the Budget.

Okay look, fine, we agree, the Budget didn’t deliver growth, but readers of this newsletter knew that we weren’t expecting the Budget to solve for growth anyway. In other words, it’s your fault if you thought it would. 

But I’ll say this — there’s one good thing that the Budget did. 

The only real big change in the Budget was the way income tax rates were calculated. Taxpayers with an annual income between Rs 5-15 lakh (~$7,000-21,000) now have the option of paying taxes at a lower rate. Provided they forgo tax exemptions.

Now this obviously led to much hilarity, criticism and potshots online.

This is headline management by this government. 

What’s the point if I have to pay the same amount of taxes? 

Looking for a CA. Please get in touch. Urgent. 

All of these may be true, but they miss the point. The point of doing this wasn’t to reduce your taxes – which is actually a form of revenue for the government — revenue that this government doesn’t have. The point was to stop financially incentivising relatively high-income citizens of India from doing responsible things that they should be doing anyway.

Just look at the most popular exemptions for income tax. Housing loan. Provident Fund. Health insurance. Investments in mutual funds. Does anyone argue that these are bad things? Tax incentives usually exist to force people to do things they don’t necessarily want to do, but are good for everyone else in the long run. Think carbon credits. Or electric vehicles.

As The Economic Times wrote in their editorial:

The government’s intention could be to move taxpayers to a low-tax regime with few exemptions. Which explains the nudge—doing away with 70 of the 120 exemption categories that income-tax payers can currently use to lower their tax liability.

Only about 10% of the 5.78 crore taxpayers make use of the exemptions, and of these about 5.3 crore taxpayers use the exemptions for claiming deductions of Rs 2 lakh or less. Given this, a simplified tax system with lower rates proves to be an attractive option for a large section of taxpayers particularly so for the younger population joining the workforce.

This is likely to encourage higher level of compliance, in time to improve tax collections. The introduction of pre-filled income-tax returns will make filing returns a less onerous and expensive task—those with relatively simple income flows will no longer have to rely on assistance from experts or chartered accountants. The effort to reduce interface with the tax bureaucracy is another welcome step towards improving compliance.

Look, nobody is saying that these are big things that will change India. 

(Actually, some people are, but forget the charlatans.)

Anyway, my point is the intention to make something simpler, even if executed badly, isn’t necessarily a bad thing. Ask anybody you know in, say, the United States how long it takes them to file their tax return. And what the process is like. 

There’s a reason why deductions exist on income taxes. They aren’t for you. They are for someone else. If they are being removed, that’s not necessarily a bad thing.

Also, buy that health insurance anyway. 

Don’t do it for a tax break. 

Tesla has gone mad

No really. 

Let me show you. 

This is Tesla’s stock price movement over the last five days. 

This is what it looks like over five years. 

Over the last five days, Tesla’s stock price got as high as $969 and fell as low as $700. Somewhere in the middle of all this, it (very briefly) accumulated a market capitalisation of $160 billion. This made Tesla larger than the Big 3 automakers in the US: General Motors ($50 billion), Ford ($36 billion), and Fiat Chrysler ($26 billion) combined. As Motley Fool wrote, it also had “almost enough room left over to toss on Mercedes-Benz manufacturer Daimler ($50 billion) for good measure”.

This is usually the part of the newsletter where I explain what’s going on, and why this happened. 

Not today. 

Because nobody has the slightest, damned clue what’s going on. 

No. They don’t. Not hedge funds. Not bankers. Not even The New York Times, which assumed that this was happening because Tesla’s short sellers were trapped in a ‘short squeeze’, a situation where they are forced to buy higher to prevent their gains from being wiped out by an upward moving stock. 

Investors that betted against Tesla’s stock are now helping to drive it far higher. A look at the mechanics of these bets, known as short sales, explains why.

The investors borrowed Tesla shares from their brokers and sold them, hoping to buy back the shares and return them once Tesla’s stock price declined. The difference between the price at which they sold and the lower purchase price would be their profit. A short-seller who borrowed a Tesla share, sold it at $300, and then bought it back at $200, would make a $100 gain (not counting the costs of the trade), for example.

But if a stock rises steadily above the price at which the short-sellers initially sold it, they are sitting on a loss. That loss — in theory — has no limits because a stock can keep rising. And if a stock zooms higher, as Tesla’s has, the short-sellers will usually have to rush to buy the shares to protect themselves against further losses. If enough investors do this, it pushes the stock price up even further, forcing even more buying by short-sellers. Other investors often join the buying, in the belief they can make quick and easy profits.

Yeah, well, Matt Levine, who is the smartest guy I know on markets and stocks and writes the second best newsletter in the planet, is quite sceptical about the short squeeze phenomenon. 

In fact, he thinks it’s far more likely that people are just caught in a form of mass hysteria. 

Or here’s a good fact from Bloomberg’s Brandon Kochkodin:

In a sign of just how the electric car-maker’s manic rally was spreading FOMO across the globe, typing the phrase “should I” into a Google search returned “should I buy Tesla stock?” as the very first autocomplete prediction.

Assuming, as I do, that Google knows us better than we know ourselves, the implication here is that the modal desire of a (US, English-speaking) person this week is to buy Tesla stock. Of all the things you could do, or at least of all the things you could ask Google about, that’s number one. “Google,” you say, “my life is in your hands, tell me what actions are most appropriate for a human in this fallen world,” and Google is like “it’s Tesla, buy Tesla, that’s the secret.”

Over to Rohin for the next section. 

YouTube, Instagram, TikTok and WhatsApp

This week we finally got official figures on the revenue brought in by video sharing and photo sharing giants YouTube and Instagram. YouTube, owned by Google, will bring in revenue of nearly $15 billion this year. And Instagram, owned by Facebook, earned its parent $20 billion last year.

Those are massive, massive numbers. Especially for services that are almost entirely free for users.

I’m old enough to remember the time when Infosys, the company that symbolised India’s tech offshoring chops, crossed $1 billion in annual revenue. It was in 2004 and it took over 25,000 employees for it to reach that milestone. (Its revenue last year was just shy of $12 billion, achieved using nearly 230,000 employees.)

What the internet, smartphones and app stores have done is unlock a new scale of global markets. Where billions of users can be acquired, engaged and monetised in a manner that no one really imagined.

Why has no such company come out of India, a country with the world’s second largest number of internet users?

Because the petri dish conditions that are required for companies like YouTube or Instagram to form (or their parents Google and Facebook for that matter), never existed in India.

The product thinking. The entrepreneurial ecosystem. The engineering talent. Reliable tech infrastructure. The visionary venture capitalists.

The companies that got funded were largely execution bets or arbitrage bets. Rarely vision bets.

But things are different today. New services are winning in India. Services like…TikTok and WhatsApp.

TikTok’s revenue is growing exponentially. App analytics company Sensor estimates its 2019 revenue to be nearly $180 million. India accounts for nearly half of its subscriber growth.

WhatsApp, also owned by Facebook, is set to launch its much awaited (and much feared) payments in India. Up till now, it has been kept in sort of a limbo by Indian regulators. As soon as the regulatory roadblocks clear, expect a significant chunk of its 400 million user base in India to start sending money to each other instead of just messages.

Have the right conditions emerged that will allow Indian companies to attain these scales? Or did India “leapfrog” past that point, and end up being dominated by large American and Chinese internet giants?

WhatsApp Pay is finally coming to India

It’s about time. But it’s here. 

The Business Standard reported the development:

“The National Payments Corporation of India (NPCI) has granted WhatsApp permission to operate its digital payment service in a phased manner,” a person aware of the matter who did not wish to be named told Business Standard on Friday.

The NPCI’s approval came days after the Reserve Bank of India’s (RBI’s) go-ahead. WhatsApp has assured the regulators that it will comply with the data localisation norms – a key factor behind the delay of the WhatsApp’s payment service launch.

In the first phase, WhatsApp will be able to offer payment services to 10 million users in India. “Pending other compliance points, the messaging platform will be able to do a full rollout,” the source said.

Once the company is able to do a full rollout, it will possibly be one of the biggest payments players in the country, given that the messaging service giant counts India as its biggest market with over 400 million users.

Of course, 10 million on a base of 400 million is nothing. 

But it gives time for PhonePe, Google Pay, Amazon Pay and the others to…strategise. 

As we wrote in an earlier edition of this newsletter…

It’s here. 

Last Week in SoftBank

Well. Well. Well

Elliott Management Corp. has quietly built up a more than $2.5 billion stake in Japan’s SoftBankGroup Corp. and is pushing the sprawling technology giant to make changes that would boost its share price, according to people familiar with the matter. 

Founded by billionaire Paul Singer, New York-based Elliott is known as a formidable activist investor, often seeking to influence company management. SoftBank is one of Elliott’s largest bets, according to people familiar with the matter. At current prices, the investment would be equivalent to about 3% of SoftBank’s market value.

The way Elliott Management Corp works is simple, but also incredibly risky. It buys up significant shares of a company it targets. Then it pushes the company to do things that push the stock price up, or pay out dividends. Then it walks away. Profit. There’s a great long read on Diginomica on how it has done this in the past with Citrix, Cognizant and more.

Some call Elliott a ‘Vulture Fund’, but personally, the irony of a fund pumping in billions to take control and make a company do things to distort its earnings, profitability and corporate governance…and to do this on SoftBank isn’t lost on me. 

That’s about it from me. What did you think? Let me know.