India Inc Is Having Its Best Days But India's MSMEs Struggle

• <01:00> India Inc is having its best days but India's MSMEs struggle, as working capital challenges mount with Pushan Sharma
• <12:34> The Rs 2,000 note is going back home to the RBI or about 76% so far
• <14:28> How Softbank sold artificial intelligence to everyone 7 years ago but barely invested in any stocks since then
  • <23:14> Jio Says it will liberate 250 million mobile phone users trapped in 2G networks

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TRANSCRIPT

NOTE: This transcript contains only the host's monologue and does not include any interviews or discussions that might be within the podcast. Please refer to the episode audio if you wish to quote the people interviewed. Email [email protected] for any queries.

Good morning, it's Tuesday the 4th of July and I'm Govindraj Ethiraj coming to you from Mumbai, India's financial capital and most rocking city in the world, when it is not pouring away.

Our top reports for today

- India Inc is having its best days but India's MSMEs struggle, as working capital challenges mount.

-The Rs 2,000 note is going back home to the RBI or about 76% so far

-How Softbank sold artificial intelligence to everyone 7 years ago but barely invested in any stocks since then

-Jio says it will liberate 250 million mobile phone users trapped in 2G networks

India's MSMEs Are Struggling

India's small and medium enterprises make up most of the employment and contribute to 40% of exports. Since demonetisation which put pressure on the cash economy and GST which pushed them towards formalisation, it's been a tough and bumpy ride for them

Things are unlikely to get better very soon.

A new report from rating agency Crisil says MSMEs will face headwinds from the imminent economic slowdown in advanced countries, particularly the US and Eurozone. These two geographies account for a third of India's overall exports.

Worse, a CRISIL analysis shows almost 20% of the micro, small and medium enterprise (MSME) sector by value is expected to witness an increase in working capital requirement this fiscal, compared with the pre-pandemic (fiscal 2020) level.

These MSMEs are in sectors already grappling with high working capital requirements and are likely to see working capital days as they are called go up by 20 to 35 days now.

Crisil's analysis covers 69 sectors and 147 clusters (two-thirds of the MSME universe), reflecting an aggregate revenue of Rs 63 lakh crore. This represents roughly 25% of India's GDP in the last year.

India's MSMEs need over Rs 100 lakh crore of debt, Crisil says. Of this, ~70% is for working capital requirements. A fourth of the debt is sourced formally. The cost of capital from the informal segment is extremely high.

Equally, assessing their working capital requirement is a challenge also because of information asymmetry and lack of high-frequency data points.

To understand the challenges and solutions for what in many ways is India's manufacturing backbone, I caught up with Crisil's Director of Research Pushan Sharma and began by asking him about what this study was telling them.

While small enterprises face tough times, as Pushan Sharma of Crisil said and we can all see, stocks of bigger enterprises are having a happy run at the exchanges.

The BSE Sensex saw a fresh closing high of 65,205, soaring 486 points yesterday.

The index hit an intraday record high of 65,248. The broader Nifty50, meanwhile, was up 141 points to close at 19,330. The index, too, scaled an all-time high of 19,336 in the intra-day trade.

Goodbyes To The Rs 2,000 Note

While many folks are still pondering the reasons for the Government's move to demonetise the Rs 2,000 note, we now learn that 76% of Rs 2,000 banknotes in circulation as on May 19 have been returned to the banks, the Reserve Bank of India (RBI) said in a statement on Monday.

As on May 19, the total value of Rs 2,000 notes in circulation was Rs 3.56 trillion. Out of this, currency notes worth Rs 2.72 trillion have been returned, the RBI said.

It also said data collected from major banks shows that out of the total banknotes in Rs 2,000 denomination returned from circulation, about 87 per cent is in the form of deposits which means people didn't exchange them for other notes while the remaining around 13 per cent has been exchanged into other denomination banknotes.

"Members of the public are requested to utilise the next three months to deposit and/or exchange the Rs 2,000 banknotes held with them to avoid any rush in the last few days before September 30, 2023," the RBI has said, in case you were hoping to hold on to your Rs 2,000 notes waiting for a miracle.

On May 19, the RBI said that in pursuance of the "Clean Note Policy" it decided to withdraw the Rs 2,000 denomination banknotes from circulation.

It also said that about 89 per cent of the Rs 2,000 denomination banknotes were issued prior to March 2017 and are at the end of their estimated life span of 4-5 years.

"The total value of these banknotes in circulation has declined from Rs 6.73 trillion at its peak as on March 31, 2018, to Rs 3.62 trillion constituting only 10.8% of notes in circulation on March 31, 2023," the RBI said.

RBI had given the customers time till September 30 to exchange or deposit the notes at their nearest bank branch. A customer is allowed to exchange Rs 2,000 worth Rs 20,000 at a time per branch.

Singularity, What Happened?

As the pumped-up venture capital fuelled frenzy unravels faster than you can say VC, I am now reminded of a speech given six years ago or in September 2017, by Masayashi Son, founder of the Softbank VC fund where he said in coming years, robots would live alongside humans.

His singular theme was Singularity, the point at which artificial intelligence finally outstrips that of humans, thus taking over jobs. He also said the number of sentient robots on Earth would rival the number of humans.
Thankfully, he gave us all some time to prepare for this epochal moment. He said it would happen in 30 years, which is 2047. I felt he said 30 years one year later also when it could have been 29 but that's nitpicking.

So he explained that now we have white collar and blue collar and that a new collar would start, which is a metal collar which will replace most of the blue-collar and many of the white collar jobs.

He posed some very poignant questions. What should we do if they replace many of our jobs? What is the value of our lives? We have to think once more, deeply."

He also said the smart robot population on Earth would be 10 billion, along with around 10 billion humans. So there would be 10 billion of us living with 10 billion of them.

He also said that every industry mankind created would be redefined. Medicine, automobiles, information, and even agriculture. Everything.

At that time, Softbank was on a roll with a $93 billion Vision Fund technology investment vehicle.

In this speech reported by CNBC via Dealbook, Mr Son said that it all went back to artificial intelligence and robots: "What is my belief and vision for this investment? I have only one belief - Singularity."

The Economist reported in May 2018 that the impact of Masayoshi Son's $100 billion tech fund would be profound because it was giving new opportunities to entrepreneurs and forcing Silicon Valley's best to stay relevant. The Economist also pointed out that Silicon Valley insiders are sceptical, saying that Mr Son is force-feeding young firms with more capital than they deserve or need and that his fund will further inflate a bubble in technology valuations.

Around this time, he also spoke to David Rubenstein, co-founder of the Carlyle Fund about Singularity…this is what he said.

According to Wall Street Journal, Son mentioned "AI" more than 500 times in quarterly and annual results presentations between 2017 and mid-2022.

So one would expect that Masayoshi was supposed to invest in companies which were obviously going to ride this AI boom and make pots of money for its investors, mostly large and institutional funds.
It now turns out in 2023 as AI is truly sweeping the world that Softbank did not quite follow through.

The Wall Street Journal reports that more than $140 billion spent on 400-plus startups later, an artificial intelligence mania is sweeping the market-and SoftBank is playing catch-up.

Despite the unprecedented spending spree that Son in 2020 said would make SoftBank "the investment company for the AI revolution," one of the world's most prolific tech investors has missed out on the frenzy in generative AI, the red-hot subsector in which products such as ChatGPT learn from huge datasets to create unique text or images, the WSJ says

Worse, Softbank has invested in just one of the 26 generative AI startups valued at more than $1 billion, according to PitchBook. SoftBank competitors including Coatue, Lightspeed and Tiger Global Management have each backed several billion-dollar companies in the area.

At the company's annual meeting in June, Son apparently pledged again to be at the forefront of the field. He said AI will reshape humanity, and that he was devoted to becoming an architect of that future, admitting that he cried during moments of introspection last year. He was "ashamed that I made many mistakes," he said.
SoftBank has however benefited from the AI boom in one of its companies: chip designer Arm, which it bought in 2016 for $32 billion.

Analysts told WSJ Arm is likely to be valued at more than $60 billion-a big boost from prior estimates-in an initial public offering expected in coming months. That, along with a weaker Japanese yen, has helped lift SoftBank shares more than 33% since late May.

But one analyst also told WSJ that SoftBank's missing the AI companies reinforces his belief that the bank "is not a great investor." Still, he said, with a boost to Arm's valuation, "potentially that really rescues SoftBank from its past disastrous investments."

Back home, Softbank has invested in a range of companies from Swiggy and Zomato to Ola and Meesho, PayTM and Lenskart. And other classifieds, yes, classifieds, edtech, physical logistics and SAAS companies.

There are many others, many of whom whose future is a little unclear to me, but that's a different discussion. Some of these companies may actually turn real profits someday. But I am not sure I see a singularity, living alongside robots in 30 years connection with any of these investments. But maybe others can.

Meanwhile, sales pitch or otherwise, Masha as his investee company founders refer to him, seems to have a heart somewhere on solving the world's problems. His investments of course don't reflect much or any of this, at least to me, but it's good to hear..

Meanwhile, in the non-singular world, manufacturing grew sharply in India, becoming the second fastest growth phase this year, though slower compared to May.

The latest data from the Manufacturing Purchasing Managers' Index (PMI), compiled by S&P Global, showed a reading of 57.8 in June, a slight decrease from May's figure of 58.7. This result was slightly below the Reuters poll expectation of 58.0.

The PMI has remained above the crucial 50-mark for two consecutive years, indicating expansion rather than contraction in the sector.

"June's PMI results again showed robust demand for Indian-made products, both in the domestic and international markets," Pollyanna De Lima, economics associate director at S&P Global Market Intelligence told Reuters news wires.

New orders and output rose sharply despite the sub-indexes easing moderately from May, driven by both domestic and international demand. Foreign demand grew for the 15th straight month.

Strong underlying demand also stoked business confidence and optimism around future business activity and rose to its highest this year, the Reuters report said.

Jio's To LIberate 250 Million 

If you are among some 250 million 2G users in the country, Jio, part of the Reliance Group, has promised to liberate you starting this month.

Jio has launched the Jio Bharat device, for Rs 999 which hopes to provide affordable access to Jio's 4G network for customers still using 2G technology. The beta trial for the first million JioBharat phones will begin on July 7, the company said in a press release.

The Jio Bharat device, positioned as a vital component of the company's "2G Mukt Bharat" (2G-free India) vision is, obviously, internet ready and comes with a Rs 123 plan that is valid for 28 days and offers 14GB of data (0.5 GB per day)

"There are still 250 million mobile phone users in India who remain ‘trapped' in the 2G era, unable to tap into basic features of the internet at a time when the world stands at the cusp of a 5G revolution. Six years ago, when Jio was launched, we made it clear that Jio will leave no stone unturned to democratize the internet and pass the benefits of technology to every Indian. The new Jio Bharat phone is another step in that direction," Reliance Jio Chairman Akash Ambani said.

Users will get JioCinema, which offers entertainment, JioSaavn with music and JioPay, a UPI-based digital payments app. For the folks over at WhatsApp, this would be most likely another lost opportunity and Google Pay and Phone Pe will face competition.

The phone, quite importantly, comes with a bright torch, says the company and a radio, which would make it particularly useful in remote and rural areas, the company says.

That's it from me for today, see you tomorrow in the morning and have a great day. Do write to me with feedback on [email protected]