Case 2 - Cashing Out: The Future of Cash in Israel

Submitted by – Group 8, Section F

PGP/22/284 - Mohit Agrawal

PGP/22/308 - Harini Katella
PGP/22/311 - Saket Saurabh
PGP/22/330 - Ankita Singh
PGP/22/415 - Muzammil Khan

1.

By using scenario planning technique, assess the future demand for cash in Israel and
advise Ilan Steiner, Head of Currency Department at the Bank of Israel about the long-
term investments to be made in cash storage and processing systems.

Answer

Bifurcation among the crowd: There is a high bifurcation among the people on the line of
taking stance between digital money and physical money. With the upper age population
reluctant to digital money, central bank must pave way for user friendly technology which can
be easily adapted by the older generation.

Regulations:

 Another way to attract people towards digital economy is to lower the charges for digital
transactions, which will motivate merchants to accept digital payment.
 High demand of Fiat money:

 Such scenario can also be a signal that corruption and tax-evasion is rising

Industry:

 With technology on their side, the central bank can impose a capping to the maximum
amount for cash transaction
 The investment in cash storage system should be toned down

Consequences:

 Once a bigger part of population has adopted digital transaction, other people will
eventually follow the crowd due to rising pressure from young generations down the line of
time.

Everyone favors Digitization (When Demand of Fiat money is low and Technology Penetration is
high): In this scenario people prefer more to use digital platforms for making payments and there
has been declining trend of people keeping cash with them. Furthermore, government policies are
also in favor of digital payments and going cashless

Regulations:

 Curbing of underground economy, digital transactions are mandated

 Reduction in production costs of fiat money

Less demand of Fiat money:

 Better provisions/offers for households making digital payments

 People are less motivated to use cash because of increase in demand of cashless
transactions
 Young generation is highly attracted to cashless transactions and doesn’t want to carry cash
all the time
 It’s easy to measure and maintain online transactions

Industry:

 Industries are moving towards cashless transactions because of government regulations and
auditing
 With a greater number of e-wallets coming up and providing attractive offers, there is a
boom in startups featuring these ideas and providing lucrative pitch to investors
Consequences:

 Production cost of fiat money will reduce drastically

 Reduction in tax evasion and increase in tax compliance
 Companies preferring cashless transactions to comply with Govt. Regulations
 Companies using technological advancements like Bitcoin to become more transparent

Technological prospects are high: In this scenario, the demand for fiat money is low and
technological prospects to go digital are high.

Population preference:

 People are more inclined towards digital transactions

Industry:

 Industries are favoring cashless transactions

 It’s easy to measure and maintain online transactions

Consequences:

 No need to further invest in producing and storing fiat money and rather invest more in
technical advancement
 Less investment in production and storage is a good sign for central bank to pursue its
interests

Worst Case Scenario: It is a regressive situation. The investment in cash storage system has to be
toned up as of now. The technology infrastructure and support for digital payment is low. Also
People are reluctant to switch to digital payment due to reasons like fear of security, saving on taxes,
preference for holding physical money etc. Thus, the circulation of cash is expected to grow and
hence investments in cash storage and development system must be increased to support it.

Public Attitude:

 People prefer holding physical money

 They are skeptical about Digital Security
 They are sensitive to tax laws and prefer cash to avoid taxes

Government Actions:
  No added benefit given by government to use digital payments
 Corruption is high

Technological Developments:

 Alternative payment methods are not well developed and not popular with masses

Consequences:

 Cash Transactions are preferred

 Demand for cash is expected to grow and investments must be made in cash storage
systems

Case 3 - The Indian Sugar Industry – Is it Sweet Enough?

1. Assess the attractiveness of the Indian sugar industry using Porter’s five forces model.
Discuss the impact of the following factors on its attractiveness:
a) Relative bargaining power differences between farmers and sugar producers;
b) Government regulations; and
c) Global sugar producers.

Porter’s five forces :

1. Threat of substitutes:
Sugar substitutes that are available in the global market contribute to less than 1% of the total
market. Volumes of consumption, sugar from cane and beet took the lead. Alternatives like
Yakon, and Monkfruit, while healthy were not as popular, as they did not offer the same taste as
white sugar and was more expensive.

However, artificial sweeteners were significantly cheaper than white sugar and represented
huge savings to the food manufacturers, especially those involved in making diet food indicating
an exponential growth (CAGR of 4.5-5%) in artificial sweeteners, which could impact export of
refined sugar from India. However, concerns regarding the safety of these sweetener in India.
This low appeal of existing alternatives, therefore allows cane sugar to rule supreme in India.

2. Supplier power:

The cooperative sector’s contribution in overall sugar production increased to 60% in 1990-1991,
but subsequently started decreasing as the government began liberalization.

The designated area arrangement, where the government made it mandatory for every
designated mill to purchase cane only from farmers who produced sugar cane within a specified
radius of the mills. reduced the bargaining power of the farmer, who in many instances was
forced to sell to a mill even if there were payment arrears from the mill. Farmers as primary
suppliers were dependent on the success of the industry.
3. Buyer power:

One of the largest consumers of sugar, India’s consumption increased by CAGR of ~3.8%
between 1990 and 2015. Companies were suffering from selling sugar at prices below the cost of
production, which is unsustainable as there was surplus of unconsumed sugar. Rising standard of
living usually leads to higher consumption of processed foods such as processed dairy, soft
drinks, snacks, etc., which have high sugar content. Also, the income elasticity of sugar demand
is usually higher for low-income countries than those in high-income countries.

4. Competition:

Stringent government regulations in all aspects of sugar production – from cane cultivation,
procurement, refining and sale – has resulted in a highly fragmented industry. Ease of cultivation
and strong prices, in comparison to other crops has resulted in many players entering the field,
both large and small, with the largest controlling less than 4% of the total output.

SRSL accounted for 20% of India’s total sugar exports and was the leader in fuel ethanol with a
20% market share. EID Parry, Bajaj Hindusthan, Balrampur Chini are some of the primary
competitors.

Global sugar producers: Experts predicted that Brazil’s sugar cane sector would continue to
grow. Ethanol and sugar continue to exert the largest economic impact

5. Threat of new entry:

The stipulation by the government prescribed a minimum radial distance of 15 km between two
sugar mills. This stipulation though was meant to ensure a steady supply of cane for all mills,
often caused distortion in the market where a virtual monopoly over a large area was
established to give the mills undue power over farmers, especially where the landholdings were
small. The government’s stipulation in addition to stifling competition, it also restricted entry
and additional investment by entrepreneurs.

Impact of the following factors on the attractiveness of the sugar industry in India:

a. Government regulations:

Heavily controlled by the government as an essential commodity, prior to 2013, every sugar mill
was mandatorily required to surrender a portion of its production to the central government at a
price lower than the market price, which enabled the government to distribute the commodity
free or at very low cost to the masses. This was a big strain on the industry and made it less
profitable for the industry. In order to incentivise the sugar mills, the Government of India
partially decontrolled the sugar industry by accepting the findings of the Rangarajan Committee,
for sustaining the future of the sugar industry in India. As per the committee’s
recommendations, mills no longer were required to sell sugar to the government under low
prices and were allowed to sell their entire produce in the open market. This move helped the
industry save close to INR 30 billion annually and bring the levy to free sugar ratio to 10:90. Thus
considerably improving the scope of the industry to play under free market forces.

b. Effect of global market:

Existing market indications were that the period of overproduction in the world sugar market
may come to an end in 2014-2015 with supply and demand almost matching. Estimates
suggested that there would be a minimal deficit of 0.6 million MT in 2014-2015, following a
revised surplus of 4.7 million MT in 2013-2014. The total output in 2014-2015 was expected at
approximately 178.7 million MT, down from 181.4 million MT in the previous year but still 1.9
million MT above consumption.

c. Global sugar producers:

There was significant overproduction in the world sugar market, the 2013-2014 sugar season
produced a global surplus for the fourth consecutive season and resulted in world sugar futures
continuing under pressure, as ample supplies of sugar remained unconsumed. This
overproduction in the global market resulted in lowest sugar prices thus affecting the mills in
India to produce less as the overall demand was low, in turn affecting our export
competitiveness.

2. What are the critical success factors of Indian sugar industry?

Ans. Critical success factors of Indian Sugar Industry:

 When government decided to expand the cooperative sector, especially for sugar farming,
as a part of its effort to industrialize the country, this helped farmers to get involved in all
aspects of production and sugar mills started becoming mediums for socio-economic,
educational, and cultural development of the towns and villages in the vicinity of the mills.
 Setting up of Rangarajan Committee by Government helped the industry save close to INR
30 billion annually and bring the levy to free sugar ratio to 10:90.
 In April 2015, in order to help stabilize falling domestic prices and protect farmers, the
central government raised customs duty on sugar imports by 15% (from 25% to 40%) and
abolished exemptions for importing raw sugar.
 The government also abolished a 12.36% excise duty on ethanol, which was used for
blending with petrol. The Indian Sugar Mills Association observed that these actions would
help to incentivize mills to supply molasses and cane juice towards production of ethanol,
which in turn would increase the net realization of sugar mills by close to INR 5/liter, and
thereby help utilize surplus sugar stocks in the following years.
 Sugar mills were not allowed to own captive farms for cane production.
 Technological Advancement
 Global demand for sugar is high.
3. Discuss whether the following possibilities could improve the attractiveness of Indian sugar
industry:
a) Changes in the industry forces within a foreseeable period of time:

The 2013 Rangarajan Committee’s report included many findings and recommendations
gathered from global market dynamics and the success of the Brazilian sugar industry. If
these regulations are adopted and implemented effectively, it could potentially elevate the
Indian sugar industry to the position of the market leader.

b) Deregulation:

Deregulation will make the sugar industry more attractive for investors. In 1998, the
government initiated a de-licensing policy in the industry as a part of the globalization
process, which resulted in significant changes within the industry and also brought down
the ratio of levy sugar to free sugar slightly from 45:55 during 1988-1992 to 40:60 during
1992-1997. In 2013, the Government of India partially decontrolled the sugar industry by
accepting the findings of the Rangarajan Committee. As per the committee’s
recommendations, mills no longer were required to sell sugar to the government under low
prices and were allowed to sell their entire produce in the open market. This move helped
the industry save close to INR 30 billion annually and bring the levy to free sugar ratio to
10:90.

c) Focus on by-products such as ethanol:

In India in April 2015, the government abolished a 12.36% excise duty on ethanol, which
was used for blending with petrol. The Indian Sugar Mills Association observed that these
actions would help to incentivize mills to supply molasses and cane juice towards
production of ethanol, which in turn would increase the net realization of sugar mills by
close to INR 5/liter, and thereby help utilize surplus sugar stocks in the following years.

In October 2008, the Government of India implemented National Biofuel Policy, which
required oil companies to sell petrol blended with at least 5% ethanol, and increase that
percentage to 20% by 2017. The policy was received as a ground-breaking initiative, since it
had the potential to reduce India's dependence on imported oil, reduce fuel costs, enhance
energy security and boost the struggling sugar industry. In Brazil, over 100 new mills began
operations to capitalize on the government’s support for biofuels and the potential of
greater demand from cane-based ethanol. If similar support from the government is
provided in India, it would lead to higher investments
 4. Compare the characteristics of Brazilian and Indian sugar industries and discuss whether
there is a possibility of convergence of these two industries in terms of their structural
characteristics.

Ans.

Brazil India

Mills were allowed to own large section of land
for sugar cultivation.
To encourage fair-trading and purchase
practices, the government made it mandatory
for every designated mill to purchase cane only
from farmers who produced sugar cane within
a specified radius of the mills. Hence, Mills
were not allowed to cultivate cane.

Price was determined by market dynamics. FRP was major authority in determining the
price.

Brazil favoured export of sugar and gave export Several permits were required for exports and
incentives. in some cases of excess export, government
permission is required.

Brazil also permits ethanol blending in petrol to India only permits 3% ethanol blending in
the extent of 26%. petrol.

In Brazil, sugarcane production was mainly in Indian growers received huge amount of
hands of private players. government subsidies for cane production.

Possibility of convergence of both the industries is almost negligible because of differentiating

government policies (such as: Government Subsidy, By-Product usage, Export/Import Policy, Policies
for farmers, etc) and weather conditions.