Description
Innovation is the application of new solutions that meet new requirements, inarticulate needs, or existing market needs. This is accomplished through more effective products, processes, services, technologies, or ideas that are readily available to markets, governments and society.
Innovations in Indian ?nance
Susan Thomas
13 October, 2010
Susan Thomas
Innovations in Indian ?nance
Two levels of innovation
1
To do something new by Indian standards. De?nition we are comfortable with: “do things differently today compared with what we did yesterday”. To do something truly new by world standards. De?nition of innovation: “crossing the frontier of pre-existing human knowledge”.
2
Susan Thomas
Innovations in Indian ?nance
Doing new things by Indian standards
Susan Thomas
Innovations in Indian ?nance
Mostly blindingly obvious
Currency derivatives. Cash-settled interest rate derivatives. Call auctions. Stock-lending. Options on commodities. Nothing really at the frontiers of knowledge in any of these. Akin to adoption of global technological advance – e.g. like the ?rst Android phone coming to India. Currency derivatives was launched globally in 1972. We did it in 2008. Why did it take us 36 years?
Susan Thomas
Innovations in Indian ?nance
What holds this innovation back?
Central planning in ?nance. Embedded in the laws, and Enforced on the ground by RBI, SEBI and the others. We broke away from central planning in the real sector, but not in ?nance.
Susan Thomas
Innovations in Indian ?nance
Doing new things by world standards
Susan Thomas
Innovations in Indian ?nance
A few success stories
NSCC: intra-day real-time VaR calculation at the client level (the “PRISM” project, built in late 1990s, rolled out early 2000s) CCIL: netting by novation for OTC transactions Governance of exchange institutions: the three-way separation between shareholders / managers / securities ?rms. New Pension Scheme: A dramatic attack upon fees and expenses in fund management.
Susan Thomas
Innovations in Indian ?nance
A failure story: Gold ETF by Benchmark
Benchmark AMC proposed a true innovation in May 2002: to apply the ETF idea to gold. At the time, it would have been a ?rst by world standards. They were given the run around by RBI / SEBI / FMC Others got the idea: Gold ETFs were launched at NYSE and on the Australian Stock Exchange Benchmark ?nally got through with a launch in February 2007. By that time, this was not an innovation by world standards.
Susan Thomas
Innovations in Indian ?nance
Looking forward
Susan Thomas
Innovations in Indian ?nance
Motivation for innovation
Innovation is driven by incentives. These are:
1 2 3
Competition Internationalisation Getting a temporary headstart
If the system fosters competition, globalisation, and rewards ?rst movers a (temporary) advantage, it will deliver more innovation. If there is lack of competition, insulated local economy, and does not reward ?rst movers, it will see low innovation.
Susan Thomas
Innovations in Indian ?nance
Motivation for innovation
Innovation is driven by incentives. These are:
1 2 3
Competition Internationalisation Getting a temporary headstart
If the system fosters competition, globalisation, and rewards ?rst movers a (temporary) advantage, it will deliver more innovation. If there is lack of competition, insulated local economy, and does not reward ?rst movers, it will see low innovation.
Susan Thomas
Innovations in Indian ?nance
The incentives of the ?rms
Innovation does not happen in a vacuum Firms expend resources on R&D based on the costs and bene?ts obtained thereof If the policy climate is hostile to innovation, this is like a tax on R&D and it will deter R&D To the extent that competition is lacking, ?rms are comfortable earning pro?t and will expend less effort on innovation. Banks in India are sleepy. More generally, Indian households do not have a choice of taking their business away from the Indian ?nancial system, so Indian ?nance is sleepy.
Susan Thomas
Innovations in Indian ?nance
Role of the State
Regulation, not central planning. Details of products and processes are best left to the market. Government/policy should focus on market failures, fairplay, laws to enforce contracts.
Susan Thomas
Innovations in Indian ?nance
Overcoming the policy bottlenecks
Percy Mistry and Raghuram Rajan reports: Many innovations run afoul of the multiple-agency structure. Short term solution: FSDC Long term solution: Fewer agencies. The laws embed central planning. Solution: Better drafting of laws, go back to our common law tradition. Budget announcement of FSLRC. Bureaucratic incentives: Lack of knowledge, safety ?rst attitude, biased towards “Just Say No” Solution: Better staff quality in ?nancial regulators, agencies like FSDC that care about development. Do not fear experimentation, do not give up with one failure.
Susan Thomas Innovations in Indian ?nance
Overcoming the policy bottlenecks
Percy Mistry and Raghuram Rajan reports: Many innovations run afoul of the multiple-agency structure. Short term solution: FSDC Long term solution: Fewer agencies. The laws embed central planning. Solution: Better drafting of laws, go back to our common law tradition. Budget announcement of FSLRC. Bureaucratic incentives: Lack of knowledge, safety ?rst attitude, biased towards “Just Say No” Solution: Better staff quality in ?nancial regulators, agencies like FSDC that care about development. Do not fear experimentation, do not give up with one failure.
Susan Thomas Innovations in Indian ?nance
Overcoming the policy bottlenecks
Percy Mistry and Raghuram Rajan reports: Many innovations run afoul of the multiple-agency structure. Short term solution: FSDC Long term solution: Fewer agencies. The laws embed central planning. Solution: Better drafting of laws, go back to our common law tradition. Budget announcement of FSLRC. Bureaucratic incentives: Lack of knowledge, safety ?rst attitude, biased towards “Just Say No” Solution: Better staff quality in ?nancial regulators, agencies like FSDC that care about development. Do not fear experimentation, do not give up with one failure.
Susan Thomas Innovations in Indian ?nance
Overcoming the policy bottlenecks
Percy Mistry and Raghuram Rajan reports: Many innovations run afoul of the multiple-agency structure. Short term solution: FSDC Long term solution: Fewer agencies. The laws embed central planning. Solution: Better drafting of laws, go back to our common law tradition. Budget announcement of FSLRC. Bureaucratic incentives: Lack of knowledge, safety ?rst attitude, biased towards “Just Say No” Solution: Better staff quality in ?nancial regulators, agencies like FSDC that care about development. Do not fear experimentation, do not give up with one failure.
Susan Thomas Innovations in Indian ?nance
doc_759337298.pdf
Innovation is the application of new solutions that meet new requirements, inarticulate needs, or existing market needs. This is accomplished through more effective products, processes, services, technologies, or ideas that are readily available to markets, governments and society.
Innovations in Indian ?nance
Susan Thomas
13 October, 2010
Susan Thomas
Innovations in Indian ?nance
Two levels of innovation
1
To do something new by Indian standards. De?nition we are comfortable with: “do things differently today compared with what we did yesterday”. To do something truly new by world standards. De?nition of innovation: “crossing the frontier of pre-existing human knowledge”.
2
Susan Thomas
Innovations in Indian ?nance
Doing new things by Indian standards
Susan Thomas
Innovations in Indian ?nance
Mostly blindingly obvious
Currency derivatives. Cash-settled interest rate derivatives. Call auctions. Stock-lending. Options on commodities. Nothing really at the frontiers of knowledge in any of these. Akin to adoption of global technological advance – e.g. like the ?rst Android phone coming to India. Currency derivatives was launched globally in 1972. We did it in 2008. Why did it take us 36 years?
Susan Thomas
Innovations in Indian ?nance
What holds this innovation back?
Central planning in ?nance. Embedded in the laws, and Enforced on the ground by RBI, SEBI and the others. We broke away from central planning in the real sector, but not in ?nance.
Susan Thomas
Innovations in Indian ?nance
Doing new things by world standards
Susan Thomas
Innovations in Indian ?nance
A few success stories
NSCC: intra-day real-time VaR calculation at the client level (the “PRISM” project, built in late 1990s, rolled out early 2000s) CCIL: netting by novation for OTC transactions Governance of exchange institutions: the three-way separation between shareholders / managers / securities ?rms. New Pension Scheme: A dramatic attack upon fees and expenses in fund management.
Susan Thomas
Innovations in Indian ?nance
A failure story: Gold ETF by Benchmark
Benchmark AMC proposed a true innovation in May 2002: to apply the ETF idea to gold. At the time, it would have been a ?rst by world standards. They were given the run around by RBI / SEBI / FMC Others got the idea: Gold ETFs were launched at NYSE and on the Australian Stock Exchange Benchmark ?nally got through with a launch in February 2007. By that time, this was not an innovation by world standards.
Susan Thomas
Innovations in Indian ?nance
Looking forward
Susan Thomas
Innovations in Indian ?nance
Motivation for innovation
Innovation is driven by incentives. These are:
1 2 3
Competition Internationalisation Getting a temporary headstart
If the system fosters competition, globalisation, and rewards ?rst movers a (temporary) advantage, it will deliver more innovation. If there is lack of competition, insulated local economy, and does not reward ?rst movers, it will see low innovation.
Susan Thomas
Innovations in Indian ?nance
Motivation for innovation
Innovation is driven by incentives. These are:
1 2 3
Competition Internationalisation Getting a temporary headstart
If the system fosters competition, globalisation, and rewards ?rst movers a (temporary) advantage, it will deliver more innovation. If there is lack of competition, insulated local economy, and does not reward ?rst movers, it will see low innovation.
Susan Thomas
Innovations in Indian ?nance
The incentives of the ?rms
Innovation does not happen in a vacuum Firms expend resources on R&D based on the costs and bene?ts obtained thereof If the policy climate is hostile to innovation, this is like a tax on R&D and it will deter R&D To the extent that competition is lacking, ?rms are comfortable earning pro?t and will expend less effort on innovation. Banks in India are sleepy. More generally, Indian households do not have a choice of taking their business away from the Indian ?nancial system, so Indian ?nance is sleepy.
Susan Thomas
Innovations in Indian ?nance
Role of the State
Regulation, not central planning. Details of products and processes are best left to the market. Government/policy should focus on market failures, fairplay, laws to enforce contracts.
Susan Thomas
Innovations in Indian ?nance
Overcoming the policy bottlenecks
Percy Mistry and Raghuram Rajan reports: Many innovations run afoul of the multiple-agency structure. Short term solution: FSDC Long term solution: Fewer agencies. The laws embed central planning. Solution: Better drafting of laws, go back to our common law tradition. Budget announcement of FSLRC. Bureaucratic incentives: Lack of knowledge, safety ?rst attitude, biased towards “Just Say No” Solution: Better staff quality in ?nancial regulators, agencies like FSDC that care about development. Do not fear experimentation, do not give up with one failure.
Susan Thomas Innovations in Indian ?nance
Overcoming the policy bottlenecks
Percy Mistry and Raghuram Rajan reports: Many innovations run afoul of the multiple-agency structure. Short term solution: FSDC Long term solution: Fewer agencies. The laws embed central planning. Solution: Better drafting of laws, go back to our common law tradition. Budget announcement of FSLRC. Bureaucratic incentives: Lack of knowledge, safety ?rst attitude, biased towards “Just Say No” Solution: Better staff quality in ?nancial regulators, agencies like FSDC that care about development. Do not fear experimentation, do not give up with one failure.
Susan Thomas Innovations in Indian ?nance
Overcoming the policy bottlenecks
Percy Mistry and Raghuram Rajan reports: Many innovations run afoul of the multiple-agency structure. Short term solution: FSDC Long term solution: Fewer agencies. The laws embed central planning. Solution: Better drafting of laws, go back to our common law tradition. Budget announcement of FSLRC. Bureaucratic incentives: Lack of knowledge, safety ?rst attitude, biased towards “Just Say No” Solution: Better staff quality in ?nancial regulators, agencies like FSDC that care about development. Do not fear experimentation, do not give up with one failure.
Susan Thomas Innovations in Indian ?nance
Overcoming the policy bottlenecks
Percy Mistry and Raghuram Rajan reports: Many innovations run afoul of the multiple-agency structure. Short term solution: FSDC Long term solution: Fewer agencies. The laws embed central planning. Solution: Better drafting of laws, go back to our common law tradition. Budget announcement of FSLRC. Bureaucratic incentives: Lack of knowledge, safety ?rst attitude, biased towards “Just Say No” Solution: Better staff quality in ?nancial regulators, agencies like FSDC that care about development. Do not fear experimentation, do not give up with one failure.
Susan Thomas Innovations in Indian ?nance
doc_759337298.pdf