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India-Vision 5 Trillion Dollar Economy

THE CONTEXT:

-Prime Minister Modi had announced an ambitious target of a $5 trillion economy for India by 2024. If achieved, India will become the third-largest economy in the world.

-The focus is on boosting services sector contribution to $ 3 trillion, manufacturing to $ 1 trillion and Agriculture to $ 1 trillion.

-However, the recent economic slowdown has made critics question the ambitious target.

While delivering his 6th consecutive Independence Day speech from the ramparts of Red Fort, Hon’ble Prime Minister of India, Shri Narendra Modi ji, On 15th August 2019, expressed confidence that India would be a $5-trillion economy in 2024.

More recently, while addressing a gathering of leaders from the Corporate World, Diplomats and others, at the centenary meet of ASSOCHAM in New Delhi on 20.12.2019, the Prime Minister said that the idea of making India a 5 Trillion Dollar worth economy is not a sudden one.

“In the past five years the country had made itself so strong that it not only could set for itself such a target but also make efforts in that direction” he said. While speaking at this occasion he also listed out the allegations that were hurled at his team, but he is committed towards a new India.

Collage showing Progress and Development depicting India Rising

Earlier, in July 2019, the Economic Survey laid out a blueprint for $5 Trillion Indian economy. The Economic Survey 2019 presented by Chief Economic Adviser (CEA) Krishnamurthy Subramanian focusses on moving to a “virtuous cycle” of savings, investments and exports to transform India into a $5 trillion economy in the next five years.

Though the Vision is laudable, the growth figures do not excite a lot. India’s economy expanded by just 4.7% between July and September, it’s seventh consecutive quarter of slowing growth. The country’s GDP was growing by more than 9 percent at the start of 2016, and by 8.1 percent as recently as early 2018. Further, the number of agencies revising India’s growth estimate is increasing, with the latest being the International Monetary Fund (IMF). Most recently, The International Monetary Fund cut it’s estimate for India’s growth this year to 4.8% from earlier projection of 6.1% which was also revised from the earlier 7% projected in July, calling on the country to use monetary policy and broad-based structural reforms to address cyclical weakness and strengthen confidence. Citing a sharper-than-expected slowdown in local demand and stress in NBFC sector, the agency in it’s latest World Economic Outlook said, “The growth markdown largely reflects a downward revision to India’s projection, where domestic demand has slowed more sharply than expected amid stress in the non-bank financial sector and a decline in credit growth.”

The markdown has been the highest for India in the latest WEO projections.

In this context, many critics have questioned the feasibility of India achieving $5 Trillion Economy status by 2024. 

WHAT IS A $5-TRILLION ECONOMY?

Before we move forward, lets understand the term clearly:

  • The GDP of an economy is the total monetary (rupee) value of all goods and services produced in an economy within a year. GDP is the deciding factor among economies (countries)as to who is the largest and so on.
  • In 2014, India’s GDP was $1.85 trillion. In 2019, it is $2.94 Trillion, and India is the fifth-largest economy in the world.
  • The $5-trillion economy is the size of a national economy as measured by the annual Gross Domestic Product (GDP). If achieved, India will become the third-largest economy in the world.
  • Apart from the monetary definition, a $ 5 Trillion Economy calls for pulling all the economic growth levers—investment, consumption, exports, and across all the three sectors of agriculture, manufacturing and services.

COMPARISON WITH MAJOR ECONOMIES OF THE WORLD

  • Though India is the fifth-largest economy, but this does not necessarily mean that Indians are the fifth-richest people in the world! If one wants to better understand the wellbeing of the people in an economy, one should look at GDP per capita.
  • GDP per capita reveals a very different, and indeed a more accurate picture of the level of prosperity in the respective economy.
  • For example, while the GDP of India and UK is nearly the same, a UK resident’s income was almost 19 times that of an average Indian in 2018. Also, the GDP of Indonesia is less than India, GDP per Capita of Indonesia is almost double than that of India.

Look at GDP per capita chart below for better understanding:

GDP and GDP per capita

S.no Countries GDP $ Trillion (in 2019) GDP per Capita in $ (in 2019)
1.  India 2.94 2171.6
2.  United States 21.44 65,111.6
3.  China 14.14 10,098.9
4.  Japan 5.15 40,846.8
5.  United Kingdom 2.74 41030.2
7.  Germany 3.86 46,564.0
8.  Indonesia 1.11 4,163.8

CONTRIBUTION OF DIFFERENT SECTORS IN ACHIEVING THE GOAL OF $5 TRILLION ECONOMY

Service Sector is the largest sector of India. Gross Value Added (GVA) at current prices for Service sector is estimated at 92.26 lakh crore INR in 2018-19.  Service sector accounts for 54.40%, Secondary sector (comprising manufacturing, electricity, gas, water supply & other utility services and construction) account for 27.03 % while the Primary Sector (comprising agriculture, forestry, fishing and mining and quarrying account for 18.57 % of total India’s GVA

Primary Sector

  • Investment is the key for the flourishment of areas like agro-processing, and exports, Agri-startups and Agri-tourism, where the potential for job creation and capacity utilisation is far less.
  • Investment needs to be driven to strengthen both public and private extension advisory systems (educating farmers about technology and management practices).
  • It would also serve as a stage to demonstrate resource conservation and sustainable use through organic, natural and green methods, and also zero budget natural farming.
  • India has the highest livestock population in the world, investment should be made to utilise this surplus by employing next-generation livestock technology. This would lead to a sustained increase in farm income and savings with an export-oriented growth model.
  • Investment in renewable energy generation (using small wind mill and solar pumps) on fallow farmland and in hilly terrain would help reduce the burden of debt-ridden electricity distribution companies and State governments, besides enabling energy security in rural areas.
  • A farm business organisation is another source of routing private investment to agriculture. Linking these organisations with commodity exchanges would provide agriculture commodities more space on international trading platforms and reduce the burden of markets in a glut season, with certain policy/procedural modifications.

Manufacturing Sector

  • A three-pillar strategy has been suggested to achieve required expansion of output — focus on existing high impact and emerging sectors as well as MSMEs.
  • To boost electronics manufacturing, it said the government should consider offering additional fiscal incentives such as a limited-period tax holiday to players investing more than an identified threshold of investment.
  • Similarly, for the auto and auto–components sector, it recommended encouragement of global leaders for the identified components to set up manufacturing bases, and incentivising players willing to invest more than a threshold in identified areas.
  • The report suggested measures to boost manufacturing in other areas including aeronautical, space, garments, organic/ayurvedic products besides emerging areas such as biotechnology, electric mobility, unmanned aerial vehicles, medical devices, robotics and chemicals.
  • For micro, small and medium enterprises, the working group said there is a need to improve access to funding by way of development of SME credit risk databases, SME credit rating, and creation of community-based funds.

Service Sector

  • Services sector include improving rail connectivity and seamless connectivity to major attractions; facilitating visa regime for medical travel; allowing expatriate professional to perform surgeries in identified hospitals; and e-commerce policy and regulatory framework for logistics segment.
  • This sector contributes significantly to India’s GDP, a goal of around 60 % contribution of services sector has been envisaged for 2024. Exports and job creation, increased productivity and competitiveness of the Champion Services Sectors like IT, tourism, medical value travel and legal will further boost exports of various services from India.
  • The Commerce Minister has identified 15 strategic overseas locations where the Trade Promotion Organisations (TPOs) are proposed to be created.
  • Multi-Modal Logistics Parks Policy (MMLPs) aims to improve the country’s logistics sector by lowering over freight costs, reducing vehicular pollution and congestion and cutting warehouse costs with a view to promoting moments of goods for domestic and global trade.
  • In the defence sector, there is a need to identify key components and systems and encourage global leaders to set up manufacturing base in India by offering limited period incentives; and ensure incentives result in technology/process transfer.
  • To promote growth of accounting and financial services, there is a need to FDI in domestic accounting and auditing sector, transparent regulatory framework, and easing restriction on client base in the accounting and auditing sector.
  • Measures like exploring introduction of insurance in the film industry, promoting private investments in film schools, exploring franchise business models to exploit film franchise, and promoting gaming industry value chains aims to push audio visual services.
  • Foreign universities are allowed to set up campuses in India, easy visa regime for students and education service providers, removing regulatory bottlenecks, providing recognition of online degrees and setting up appropriate evaluation techniques for online courses for the education sector.

INITIATIVES UNDERTAKEN FOR ACHIEVING $5 TRILLION ECONOMY TARGET

The Government is working hard to realise Prime Minister Narendra Modi’s dream of making the country a five trillion-dollar economy by 2024 and has taken steps to overcome the phase of economic slowdown. The nation is witnessing a new sense of dynamism and a number of initiatives are being taken in line with Modi’s vision of ‘New India’. Principal Secretary to the Prime Minister Pramod Kumar Misra recently said that while several fundamental and path breaking reforms have been undertaken in the form of Insolvency and Bankruptcy Code and GST, continuous opening up and liberalisation of FDI have resulted in unprecedented inflows of FDI into the country. On December 13, Finance Ministry unveiled a detailed presentation on steps taken to boost economy. Chief Economic Advisor Krishnamurthy Subramanian said the government is focusing on increasing consumption to boost economic growth. Presenting steps taken by the government in the past few months to pull the economy out from a six-year low growth, he said the measures include corporate tax cuts to improve risk-return of companies.

Here’s a list of all measure announcements that were made:

1. Economic survey outlined a plan to make India $5 trillion economy with emphasis on driving up investment. On the consumption side, the government has taken steps to help the NBFCs and HFCs.

2. The govt provided support to NBFCs/HFCs under the partial credit guarantee scheme. The govt sanctioned support for Rs 4.47 lakh crore to NBFCs & HFCs which includes Rs 1.29 lakh crore for pool buyout of assets.

3. Within two days of cabinet approval, 17 proposals worth more than Rs 7,000 crore approved. Proposals worth Rs 20,000 crore will be approved over next two weeks under the partial credit guarantee scheme.

4. On investment side, the government has taken steps to boost investment, support real estate, credit expansion, corporate tax and bank recapitalisation.

5. To boost liquidity in the market, the government has cleared dues worth more than 60% of 32 CPSEs in the last two months.

6. Under the new external benchmarking scheme announced by the RBI, more than 8 lakh or Rs 72,201 crore worth of loans sanctioned under the new regime till Nov 27.

7. 66% of Budgeted capex expenditure of Rs 3.38 lakh crore has been taken so far. Higher government capital expenditure allows crowding in of private investment. April-Nov capex of 32 CPSEs is at Rs 98,000 crore. Railway and road ministries will have undertaken capex of Rs 2.46 lakh crore by December 31, he said.

8. Rs 60,314 crore of capital has been infused into PSU banks. Lenders have disbursed Rs 2.2 lakh crore to corporates and Rs 72,985 crore to MSMEs.

9. FDI inflows of $35-billion in first half of FY20 vs $31 billion in the same period last year has been achieved.

10. Rs 1.57 lakh cr tax refunded this year vs Rs 1.23 lakh cr last year: Revenue Secretary. The step will boost consumption in economy. Income tax refund up 27% so far in FY20.

11. Realty fund of Rs 25,000 crore has been created for last mile funding for stalled projects. Necessary changes in IBC made to allow projects facing insolvency to avail funds under scheme.

12. Unified regulator for international financial services enables capital flow without any hurdles.

13. Important changes in IBC: Ringfencing successful bidders of stressed assets from prosecution.

WAY FORWARD 

Going forward what steps can Government take to get closer to its target, Niti Ayog CEO Amitabh Kant recently outlined these steps.

1. Increase Ease of Business and Ease of Living to promote private investments

Over the last four years, the government has scrapped over 1,300 antiquated law! It has done away with a lot of archaic procedures, rules and regulations.

Through a series of reforms, India has jumped up 65 positions in The World Bank Ease of Doing Business. No other large country has been able to do this. India has jumped up 65 positions, but our challenge is that in the next two years India must reach the top 50 and in the next five years reach the top 25.

2. Urbanization – a big driver of growth

Cities account for less than 5% of the earth land mass, but they account for over 75 % of the global GDP! So, Urbanization in cities is important as they are centres of economic growth.   While the process of urbanization has ended across America and Europe, and matured in China, it has just begun in India. In the next 5 decades, India should see more Urbanization than what we’ve done in the last 500 years. While there will be many challenges, India needs more Urbanization to grow rapidly.

3. Globalization for growth

India exists in a globalized and interdependent world. Like in Japan, Korea and China, Globalization has helped large sections of population to be lifted above the poverty line. India’s share in global export is less than 2%. So, India must learn the art of size and scale, of manufacturing to size of scale and to penetrating.

4. Women Participation is key

India cannot grow at high rates over a 3-decade period without gender parity. In India, only 26% of the women work; the worldwide average is 48%. If such a major chunk of the population is not working and we consciously don’t put women into positions of power, it will be very difficult for India to grow.

5. Agriculture Reforms in vital

It’s not possible to grow over long periods of time without some very major structural reforms in the agriculture sector because that’s where close to 60% of India lives. You can’t keep growing on subsidies, you can’t keep going on just giving assistance to farmers without ensuring better markets, without putting technology, without contract farming and so on. Agriculture sector reforms are critical.


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11

‘Medicare-for-All’ program could cost $32 trillion but may also save $2 trillion

Sen. Bernie Sanders took aim at a new report released by a conservative Koch-affiliated economic policy think tank, saying its findings “accidentally make the case” for Medicare-for-All.

“Let me thank the Koch brothers, of all people, for sponsoring a study that shows that Medicare-for-All would save the American people $2 trillion over a 10-year period,” Sanders said Monday in a video released on .

Thank you, Koch brothers, for accidentally making the case for Medicare for All! pic.twitter.com/speuEL6ETC

The report was published Monday by the Mercatus Center, a think tank at George Mason University that receives donations from the conservative Koch network and supports “market-oriented ideas.” It concludes the Sanders Medicare-for-All plan would increase federal budget commitments by about $32 trillion over its first 10 years of implementation.

Medicare-for-All, also known as single-payer healthcare, has become increasingly popular among Democrats, including progressive candidates such as Alexandria Ocasio-Cortez, who pulled off a shocking primary upset last month in New York’s 14th Congressional District and made the issue a central part of her platform.

?? My platform brings all the votes to the yard: ??

– Federal Jobs Guarantee
– Medicare for All
– Tuition-free public college
– Reduce prisons by 50%
– Defund ICE

— Alexandria Ocasio-Cortez (@Ocasio2018) April 2, 2018

The report, authored by Mercatus Center senior research strategist Charles Blahous, notes that if the Medicare-for-All plan is successful, it would lower administrative and drug costs by $2 trillion while cautioning “actual savings are likely to be less than assumed under these projections.”

“I suspect that that is not what the Koch brothers intended to do, but that is what is in the study,” Sanders said of the projected savings.

Charles Koch talks during an interview with the Washington Post at the Freedom Partners Summit on Monday, Aug. 3, 2015 in Dana Point, Calif.

Charles Koch talks during an interview with the Washington Post at the Freedom Partners Summit on Monday, Aug. 3, 2015 in Dana Point, Calif. Washington Post/Getty Images, FILE

While the Koch brothers themselves did not author the report, Koch Industries CEO Charles Koch sits on the board of the Mercatus Center. This past weekend, the Koch network held its biannual meeting in Colorado Springs, where it said it plans to rebrand itself ahead of the midterms.

(MORE: Koch network takes aim at ‘protectionism,’ slams Trump administration as ‘divisive’)

Robert Graboyes, a senior research fellow and health care scholar at the center who read Blahous’s report through its production, said the report doesn’t “predict” $2 trillion in savings.

“The paper says if Sanders’s plan fulfills everything its supporters hope it will fulfill, it will result in $2 trillion less in expenditures,” he told ABC News.

And more important, the $32 trillion dollar figure isn’t new, according to Graboyes, who says even left-leaning think tanks have come to similar conclusions.

“The Urban Institute, which is left-of-center, also found that the Sanders plan would cost $32 trillion,” he said, referring to the group’s 2016 report concluding then-presidential-candidate Sanders’s plan would have increased federal expenditures by $32 trillion between 2017 and 2026.

Sen. Bernie Sanders speaks during a health care rally on Sept. 22, 2017 in San Francisco.

Sen. Bernie Sanders speaks during a health care rally on Sept. 22, 2017 in San Francisco. Justin Sullivan/Getty Image, FILE

But Graboyes warned that, according to the report, even doubling all currently projected federal individual and corporate income tax collections would be “insufficient” to finance the costs of Medicare-for-All.

“In individual states like California and Vermont, similar single-payer healthcare plans tanked because increasing taxes was too much of a gamble,” he said.

Even doubling individual and corporate income tax collections at the federal level would fall short of fully funding Medicare for all. https://t.co/5XxJVobxj6 #MedicareForAll

— Mercatus Center (@mercatus) July 30, 2018

Josh Miller-Lewis, Sanders’s press secretary, said the additional $32 trillion is already being spent by private insurers, and the Medicare-for-All plan would simply move the money to the government.

“In the process of moving the money from private insurers to a national health care system, you’re actually saving $2 trillion by making the system more efficient,” he told ABC News.

Sen. Bernie Sanders speaks on health during an event on Capitol Hill, Sept. 13, 2017 in Washington.

Sen. Bernie Sanders speaks on health during an event on Capitol Hill, Sept. 13, 2017 in Washington. Alex Wong/Getty Images, FILE

Moreover, the fact that a conservative institute drew conclusions about the plan’s savings is a testament to the Medicare-for-All’s efficiency, according to Miller-Lewis.

“This is a right-wing think tank, and even they found that Medicare-for-All would save money compared to the current system,” he said.

Graboyes declined to comment on how Sanders was interpreting the Mercatus Center report but said he has “high respect for senators across the board.”

“I’ve never worked at a place where scholars were more independent and free of outside interest,” he said. “My fellow scholars and I subscribe to the highest academic standards.”

Even doubling individual and corporate income tax collections at the federal level would fall short of fully funding Medicare for all. https://t.co/5XxJVobxj6 #MedicareForAll

Josh Miller-Lewis, Sanders’s press secretary, said the additional $32 trillion is already being spent by private insurers, and the Medicare-for-All plan would simply move the money to the government.

“In the process of moving the money from private insurers to a national health care system, you’re actually saving $2 trillion by making the system more efficient,” he told ABC News.

Sen. Bernie Sanders speaks on health during an event on Capitol Hill, Sept. 13, 2017 in Washington.

Sen. Bernie Sanders speaks on health during an event on Capitol Hill, Sept. 13, 2017 in Washington. Alex Wong/Getty Images, FILE

Moreover, the fact that a conservative institute drew conclusions about the plan’s savings is a testament to the Medicare-for-All’s efficiency, according to Miller-Lewis.

“This is a right-wing think tank, and even they found that Medicare-for-All would save money compared to the current system,” he said.

Graboyes declined to comment on how Sanders was interpreting the Mercatus Center report but said he has “high respect for senators across the board.”

“I’ve never worked at a place where scholars were more independent and free of outside interest,” he said. “My fellow scholars and I subscribe to the highest academic standards.”


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23

Amazon Joins Trillion Dollar Club

It’s official, Apple now has company in the Trillion Dollar Club as Amazon’s stock surged past $2,000, briefly pushing the company’s total value to just over the trillion-dollar mark.

This makes the company’s CEO Jeff Bezos the richest person in the world, with a net worth estimated at around $166 billion dollars.

Amazon started out as just another internet company struggling to turn a profit. Over the years, however, the company has become a true retail powerhouse, and a disruptive force in the industry.

Some analysts predict that the company’s stock price is poised to climb even higher. Brian Nowak, (an analyst at Morgan Stanley) cities some reasons for his continued optimism. These include the company’s rapid growth, their improving business mix and their profit potential. Overall, Amazon’s total value only trails Apple’s by about $100 billion.

The last twelve months have been kind to Amazon, and the company has seen its stock price surge nearly 75 percent. The company is aggressively expanding into new businesses and finding success in doing so, which is exciting investors. Last year, for example, Amazon purchased Whole Foods Market for $13.7 billion, and recently acquired the online pharmacy, PillPack.

While there are only two members of the trillion-dollar club, there are two other companies poised to join their ranks. Both Microsoft and Google’s parent company, Alphabet are currently valued at about $850 billion. A modest nudge in either company’s stock price could push either of them into the trillion-dollar stratosphere.

Although there are a number of analysts who are excited by the stock’s future prospects, there is also some cause for concern. At current prices, the stock is trading at nearly 100 times earnings, which is nearly five times the broader market’s P/E ratio of 21. Then there’s the considerable risk that Amazon may suffer from a regulatory crackdown, given its size and dominance in the market.

Even so, it’s great news, and even better if you already own Amazon stock!

Used with permission from Article Aggregator


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22

Why Trillion-Dollar Coronavirus Bailouts Will Shackle The U.S. Economy

Hot on the heels of passing an $8.5 billion coronavirus bill, the White House and congressional lawmakers have proposed yet more pork-laden coronavirus “rescue” packages with a running price tag of more than $1.3 trillion.

The Families First Coronavirus Response Act (FFCRA) passed with overwhelming support in the House of Representatives on Saturday. The Senate will likely vote to approve the legislation this afternoon.

With the help of Trump administration officials, House Democrats drafted and passed the FFCRA so quickly that the Congressional Budget Office was unable to estimate its total cost, meaning taxpayers could be on the hook financially for an indeterminate amount.

Amazingly, the FFCRA will not be the last word of the federal government on the coronavirus crisis. News broke earlier this week that the Trump administration is requesting a $1 trillion stimulus and bailout package—significantly larger than the $831 billion stimulus package passed in 2009 under the Obama administration that provoked cries of “socialism!” from conservatives everywhere.

Where Is the Money Going?

The emergency measures include a grab bag of long-sought leftist priorities. Perhaps worst of all are the two new federal paid leave mandates, lasting until the end of the year, for companies with fewer than 500 employees. The first requires companies to pay for up to two weeks of sick leave. The second provides employees three months of paid family and medical leave if their children’s school or daycare closes or if a family member is quarantined.

Since school closures around the country encompass more than half the nation’s school-children, it is not inconceivable that nearly all parents fitting the requirements might take advantage of these two new entitlement programs, both of which will be profoundly costly to businesses and the federal budget.

Businesses will be compensated for these expensive benefit mandates with money from the U.S. Treasury through a complex scheme of tax refunds administered by the IRS. Yet there remain concerns that some cash-poor businesses cannot remain solvent long enough to survive until they receive the credits. Additionally, the government reimbursement for these programs fails to consider all the costs for businesses when employees do not show up for work.

Another component of the legislation is sure to irritate welfare state reformers: the FFCRA obliterates the Trump administration’s bid to limit food stamp benefits for able-bodied adults without children. The long-planned reform, which had been slated to go into effect in April, would have strengthened the work and training requirement for some single adults collecting food stamps.

The FFCRA also expands unemployment insurance and federal Medicaid funding, and provides more than $1 billion in additional funding for food welfare programs.

Although the details of the mammoth $1 trillion stimulus package are still in flux, a Treasury Department memo suggests the newly proposed coronavirus stimulus package would give a $50 billion bailout to the airline industry. The package includes an additional $150 billion in loan guarantees to other affected industries and a payroll tax cut sure to expedite the coming insolvency of Social Security.

During a Tuesday press conference, President Trump and Treasury Secretary Steven Mnuchin announced their intention to distribute “big” direct cash payments to Americans, perhaps in denominations of $1,000 or more per person. This measure is estimated cost taxpayers $500 billion.

Bad Economic News

Here are five reasons the “Family First Coronavirus Response Act” and other coming bailout and stimulus packages are economic bad news for Americans.

Bad Precedent: Due to our human nature, we make quick studies in dependency when “free” things offered to us. These new entitlements and bailouts may prove to be the proverbial camel’s nose under the tent, just as have nearly all other welfare expansions.

Once the bad precedent is established, it is all too likely that the electorate will have a harder time resisting demands from politicians for greater government control of the economy. These “temporary” programs make permanent national sick leave and paid family leave more likely in the future.

National Debt: The debt the federal government owes currently sits at $23.5 trillion. This means every American citizen born in 2020 enters the world owing $73,500 to our nation’s creditors.

Emergency spending for the coronavirus only adds to the unconscionable level of debt we already owe. The money this nation borrows will need to be repaid through inflation or higher taxes sometime in the future.

Inflation: If taxes are not immediately raised to cover the emergency spending, the Federal Reserve will need to print new dollars—create money out of thin air—to finance these new programs.

This inflation in the money supply predictably leads to price inflation. One of the most basic economic principles is that a greater quantity of dollars chasing the same number of goods eventually results in rising prices.

Higher Taxes: Increased government spending and national debt will necessitate higher taxes for all Americans and businesses, whether sooner or later.

Lest we forget, every dollar taken from us in taxes is a dollar we cannot spend on the things we need and want. We will have to foot the bill for all this extra spending—and that comes at the price of future economic growth and a lower standard of living for everyday Americans.

Reduced Future Economic Growth: All these inflationary effects and higher taxes will inevitably hinder the growth of the economy in the future. Higher taxes make it more difficult for businesses to save and reinvest profits in expanding operations, boosting employee pay and benefits, or engaging in research and development.

Similarly, higher taxes for individuals discourages productivity and results in less household saving and investment. This means there will be less capital available for businesses to expand operations and boost productivity.

Rising productivity and profits, greater saving and investment, and more funding for research and development are all needed for robust economic growth. Economic recoveries tend to be lackluster without the necessary combination of these fundamentals.

Let us look back in economic history for a case study. During the economic troubles following the stock market crash of 1929, President Franklin D. Roosevelt’s “New Deal” relief and recovery policies created greater government interventions into the economy, ultimately with the result of reducing profits and raising taxes on businesses.

These New Deal policies exacerbated and prolonged the downturn, turning it into a “great” depression that lasted 15 years. In fact, a study by University of California at Los Angeles economics professors calculated that the interventionist policies of the New Deal elongated the Great Depression by seven years, delaying the natural market corrections and recovery that would have occurred otherwise.

Like the New Deal, every additional billion dollars in stimulus and bailout spending will further delay the economic recovery we all want and need. Ironically, these government interventions always end up aggravating the recessions and depressions they are intended to alleviate, causing even greater economic complications in the long run.

How This Affects President Trump’s Reelection Chances

In summary, the newly proposed bailout and stimulus packages smack of big government welfarism and crony capitalism. These are the sort of policies that will move the needle toward socialism, impoverishing us and stripping the productive engines of our economy.

If President Trump wants to win reelection on his economic record, he had better drop his support of this legislation, which is sure to cause lasting economic problems.

Likewise, if the president’s supporters in the Senate want a quick and sustainable economic recovery post-coronavirus, they had better gather their senses and stand firm against bailouts and stimulus packages like this economically disastrous legislation. Our financial wellbeing and the future of our liberties depend upon it.

Blaine Conzatti is a trained economist who serves as the director of advocacy for Family Policy Alliance of Idaho. He is committed to the Judeo-Christian principles of the American founding and the free market policies that empowered the growth of most prosperous and free nation in world history.


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22

Private Equity in 401(k) Plans – A Trillion Dollar Opportunity?

Private equity sponsors and other managers of private market investments, including private real estate, infrastructure, and credit (together, Private Market Investments), have long cast their eyes upon the 401(k) plan market. As of 31 December 2019, employer-sponsored defined contribution retirement plans held approximately US$8.9 trillion, of which US$6.2 trillion was held in 401(k) plans and US$1.1 trillion in 403(b) plans.[1] Because of liability concerns and distinct legal and operational issues, defined contribution plans that are subject to the Employee Retirement Income Security Act of 1974, as amended (ERISA) have been reluctant to include Private Market Investments as investment options for plan participants.[2] On 3 June 2020, the Department of Labor (DOL) published an information letter that should help managers of Private Market Investments access this significant, growing market.[3] While the DOL’s letter does not open the door to direct access to Private Market Investments by 401(k) plan participants, it does provide a framework for the expanded use of private equity and, we believe, other types of Private Market Investments in managed asset allocation funds such as target date funds.[4]

The Role of Target Date Funds in 401(k) Plans

Typically, 401(k) plans offer plan participants a menu of investment options, and plan participants can select the portfolio of funds or other investments that best suit their needs. To encourage greater retirement savings, many plans automatically enroll eligible workers in the plan, unless the workers affirmatively opt out. Automatic enrollment diverts funds into a default investment (i.e., an investment into which contributions are invested absent a specific choice by a plan participant). The DOL has designated three types of “qualified default investment alternatives” (QDIAs), which, if used by the plan, provide the responsible plan fiduciary with limited protection from fiduciary liability: (i) target dated funds, (ii) balanced funds, and (iii) professionally managed accounts.[5] Target date funds—investment funds that invest in a mix of assets that shift from higher-risk to lower-risk investments over a pre-established glidepath—quickly became the most popular QDIA and, by some estimates, 401(k) plans now hold over US$2.0 trillion in retirement assets across mutual fund, collective investment trust, and separate account structures.[6] 

In the United States, target date funds are typically established as mutual funds or bank-sponsored collective investment trusts operated in a fund of funds structure. Assets classes are often exclusively comprised of public securities (bonds and equities). Target date fund sponsors offer a series of funds designed for plan participants that expect to retire in different years (e.g., 2030, 2035, 2040). 401(k) plan participants may allocate some or all of their balance to target date funds, and automatically enrolled plan participants are directed by default into a particular series based on their anticipated retirement date.

The DOL’s Guidance

401(k) plan fiduciaries have been reluctant to include Private Market Investments in a plan’s investment lineup due to legal and operational concerns. But on 3 June 2020, the DOL, which is responsible for enforcing ERISA’s fiduciary responsibility provisions, published an information letter confirming that a 401(k) plan fiduciary may offer managed asset allocation funds, including target date funds, that include an allocation to private equity while meeting their fiduciary responsibilities.

The DOL acknowledged that, as compared to the investments typically available in 401(k) plans, private equity investments tend to involve more complex organizational structures and investment strategies, longer time horizons, and higher fees. In addition, valuation of private equity investments is more complex because private equity investments often have no easily observed market value and there is often an element of judgment involved in valuing each of the portfolio companies prior to their sale by the investment fund or other liquidity event. These factors have complicated the evaluation of private equity investments by 401(k) plan fiduciaries under ERISA’s fiduciary duty provisions, which require, among other things, that plan fiduciaries evaluate 401(k) plan investment options prudently and solely in the interest of plan participants.

To assist 401(k) plan fiduciaries in navigating these matters, the DOL provided a “road map” or analytical framework for the assessment of private equity exposure in target date funds and other managed asset allocation funds. According to the DOL, in assessing the prudence of a fund that includes private equity investments, a fiduciary should consider the following matters:

  • Whether the fund offers plan participants the opportunity to invest their accounts among more diversified investment options within an appropriate range of expected returns net of fees, including management fees, performance fees, and other fees or costs that impact returns;
  • Whether the fund is overseen by plan fiduciaries (using third-party investment experts as necessary) or managed by investment professionals that have the capabilities, experience, and stability to effectively manage an asset allocation fund that includes private equity investments given the nature, size, and complexity of the private equity activity;
  • Whether the fund has limited the allocation of investments to private equity in a way that is designed to address the unique characteristics associated with such a fund, including cost, complexity, disclosures, and liquidity and has adopted features related to liquidity and valuation designed to permit the fund to provide liquidity for participants to take benefits and direct exchanges among the plan’s investment line-up consistent with the plan’s terms (in the letter, the DOL referenced the Investment Company Liquidity Risk Management Programs rule, which was adopted by the Securities and Exchange Commission (SEC) in 2016, and codified the SEC’s longstanding guideline limiting investments in illiquid assets for registered open-end investment companies to 15 percent)[7];
  • Whether the characteristics of the fund align with the plan’s characteristics and needs of the plan participants, taking into account, among other things, the fund’s investment allocation and strategy, fees and other expenses, and the nature and duration of any liquidity restrictions, a participant’s ability to access funds (e.g., loans) and ability to change investment selections on a potentially frequent basis;
  • Whether plan participants will be furnished adequate information regarding the character and risks of the fund to be able to make an informed assessment regarding making or continuing an investment in the fund; and
  • Whether the fiduciary has the skill, knowledge, and experience to make these determinations.

The DOL’s letter does not address whether or how a plan can offer direct investments into private equity. While this practice is not per se prohibited, it would raise additional legal and operational issues that plan fiduciaries would find difficult to reconcile absent additional guidance. Also, the letter does not address the complex ERISA considerations for sponsoring and operating a target date fund that includes an allocation to private equity when the target date fund is itself subject to ERISA, which is the case for target date funds established as collective investment trusts.

Considerations for Private Fund Sponsors

Managers of Private Market Investments seeking to receive an allocation of assets from target date funds should consider what structures and operational features of private funds will best meet the challenges inherent in managing 401(k) plan assets. In addition to the valuation, liquidity, and fee constraints described below under “Considerations for Target Date Fund Sponsors”, a private fund sponsor’s experience and expertise overseeing the activities of a range of Private Market investment funds as well as a fund’s “ERISA capacity” (i.e., whether a fund can have additional ERISA investors without causing the fund itself to be subject to ERISA) are important considerations.

Private Markets Investments: Private Market Investments include private equity, real estate, infrastructure, commodities, and other asset classes. While the DOL’s letter specifically references allocations to private equity, because Private Market Investments pose similar legal and operational challenges for 401(k) plans, we believe the guidance set forth in the DOL’s letter should apply more broadly to additional types of Private Market Investments.

Managers With Oversight Experience: The DOL’s letter suggests that when evaluating investment options a fiduciary should consider (i) whether plan participants will have the opportunity to invest their accounts among more diversified investment options and (ii) whether third-party investment experts and investment professionals with the capabilities, experience, and stability are involved in the management of the option. In light of this guidance, 401(k) fiduciaries may derive comfort from target date funds that obtain exposure to Private Market Investments through the oversight of seasoned fund of fund managers with expertise performing diligence on, entering into transaction with, and overseeing the activities of a range of Private Market Investment funds. These managers, whose experience and expertise would supplement the proficiencies of traditional date fund managers, could establish private funds specifically designed to complement a generic liquid portfolio, or could be engaged directly by target date funds as sub-advisers to manage a Private Market Investment sleeve of the target date fund.

Structuring and Marketing Private Market Investments: Managers of Private Market Investments seeking to develop products for the target date fund market will need to consider not only the structure of these allocation vehicles, but also the nature and scope of permissible marketing activities. Registered closed-end funds (interval funds and tender offer funds) can accommodate Private Market Investments and provide a viable path for private fund managers to access 401(k) assets. However, these funds introduce operational expenses and impediments that are not present in private funds. On the other hand, structuring allocation vehicles as traditional private funds can impair a private fund manager’s ability to highlight the services and benefits it can provide to target date fund sponsors. Private fund managers may consider as an alternative relying on Rule 506(c) of the Securities Act of 1933, as amended, which permits issuers to engage in general advertising without giving up the benefits of operating a private fund. The primary drawback of Rule 506(c)—enhanced due diligence to ensure that purchasers are accredited investors—would not be an impediment for funds designed to provide a Private Market Investment allocation to target date funds organized as registered investment companies, which are accredited investors by definition.

ERISA Capacity: Target date funds structured as collective investment trusts or separate accounts can cause an underlying private fund to become subject to ERISA (known as “plan asset” funds).[8] If a private fund is subject to ERISA, the manager is subject to ERISA’s fiduciary responsibility standards and prohibited transaction restrictions when managing and operating the fund. Because of the complexity in operating certain private funds—particularly funds that invest in Private Markets Investments—as “plan asset” funds, many funds seek to avoid “plan asset” status. This can be achieved by limiting ERISA and similar investors to less than 25 percent of each class of equity interest in the fund (known as the 25% test); complying with requirements to be a “venture capital operating company” (VCOC); or, for real estate funds, complying with the requirements to be a “real estate operating company” (REOC).[9] Therefore, managers of private funds seeking to receive an allocation of assets from a target date fund structured as a collective investment trust or separate account will need to consider whether their investment strategy can be operated within an ERISA “plan asset” fund. If not, managers of underlying private funds will likely need to limit ERISA investors to comply with the 25% test, unless the underlying private fund can be structured and operated to meet the VCOC or REOC requirements. In the alternative, Private Market Investment managers can avoid these issues entirely, if the investment vehicle can be structured as a registered closed-end fund, which is not considered to be an ERISA “plan asset” fund regardless of the type of strategy or investors in the fund.

Considerations for Target Date Fund Sponsors

Target date fund sponsors will also need to consider several legal and operational matters when designing investment products for the 401(k) market that include an allocation to Private Market Investments. The primary challenges include providing sufficient liquidity for investors and valuing investments on a daily basis.

Liquidity: As is the case for substantially all mutual funds, investment options available in 401(k) plans need to allow plans to support daily contributions and withdrawals at the plan participant level.[10] For example, a plan participant may want to (i) rollover his or her assets to an IRA, (ii) take a loan from the plan, or (iii) switch his or her investment to a different target date fund series. When a target-date fund experiences net outflows (or inflows) on a given day, the fund may need to raise (or invest) cash and rebalance in accordance with the target date fund’s pre-established glidepath. Potential solutions to these liquidity needs include:

  • Maintaining a cash buffer in the target date fund or in the fund’s allocation to Private Market Investments;
  • Including assets with a higher liquidity profile, such as listed private equity, in the Private Market Investments allocation;
  • Batch processing transactions (i.e., treating multiple buy and sell orders across different target date fund series as one transaction);
  • Drawing on a credit facility to facilitate redemptions; or
  • Raising cash by selling the target fund’s publicly traded assets.

Valuation: 401(k) plans also require daily valuation of plan investments. Private Market Investments, however, are often valued on a monthly, quarterly, or even yearly basis. To address this discrepancy, target date fund sponsors seeking to access the 401(k) market will need to establish procedures to gather relevant information to re-evaluate quarterly or monthly valuations from the underlying funds, and determine current fair valuation on a daily basis.[11]

Fee Structure: ERISA generally provides that a service provider’s fees can be no more than reasonable. In the last several years, a number of class action lawsuits have targeted 401(k) plan sponsors alleging the plan hired service providers or offered investment options that charged plan participants excessive fees. The total fees charged by a target date fund are largely based on the fees paid to managers of the underlying funds in the target date fund’s portfolio. Therefore, for legal (and commercial) reasons, sponsors of target date funds used in 401(k) plans must consider whether the underlying funds cause the overall target date fund fees and expenses to be excessive. Since the fees and expenses associated with managing Private Market Investments are typically higher than fees for more traditional and liquid asset classes, target date fund sponsors will likely want to consider setting allocations to Private Market Investments that, when blended with traditional investment products, achieve a total expense ratio that is appropriate for ERISA plans. Target date fund sponsors should also consider performing market research on the typical fee structures for Private Market Investment managers to help 401(k) plan fiduciaries understand and gain comfort that the fees charged by managers used in their funds are not excessive when compared to similar managers.[12]

Securities Law Issues: Target date managers should be aware of the issues that may arise when 401(k) plans invest in private investment funds that rely on the Section 3(c)(1) or Section 3(c)(7) exceptions under the 1940 Act. Section 3(c)(1) applies to a fund whose outstanding securities are owned by not more than 100 persons and Section 3(c)(7) applies to a fund whose outstanding securities are owned exclusively by “qualified purchasers” (as defined by the 1940 Act). In certain cases, funds need to look through to the beneficial owners of an entity participating in the fund, such as the participants in a 401(k) plan, for purposes of compliance with the 100-investor limit or the qualified purchaser requirement. A series of SEC no-action letters provides that a fund does not need to look through a 401(k) plan to the plan participants for these purposes, as long as the fund limits its investment in Section 3(c)(1) and Section 3(c)(7) funds to not more than 50 percent of the fund’s assets, the manager of the fund determines when and how much to invest in particular underlying Section 3(c)(1) and Section 3(c)(7) funds, and the fund does not represent that it will invest in particular Section 3(c)(1) and Section 3(c)(7) funds.[13]

Target Date Funds as “Plan Asset” Entities: Decisions relating to the design of a product to be offered to ERISA plans should not be viewed as fiduciary decisions subject to ERISA’s fiduciary responsibility requirements. However, if a target date fund is an ERISA “plan asset” entity, such as a fund structured as a collective investment trust, the target date manager is subject to ERISA’s fiduciary responsibility standards and prohibited transaction restrictions when managing and operating the fund. Managers of such funds should consider their duty to avoid non-exempt prohibited transactions under ERISA, such as transactions between the fund and a “party in interest”[14] of plans investing in the fund and economic or other benefits flowing to the target date manager or its affiliates (e.g., additional fees) as a result of a decision by the target date manager to cause the fund to enter into a transaction. Managers should carefully consider whether compliance with a prohibited transaction exemption, such as DOL prohibited transaction exemption 84-14 or 91-38, or other steps are advisable to avoid prohibited transactions.

We believe the DOL’s letter provides a helpful analytical framework to assist plan fiduciaries in selecting and monitoring target date funds that include an allocation to Private Market Investments. In time, the DOL’s letter should help level the playing field between defined benefit pension plans, which invest hundreds of billions of dollars in Private Market Investments, and 401(k) plans, which rarely invest in Private Market Investments.

We anticipate continued interest and developments in this area due to the vast market opportunity for managers of Private Market Investments, regulatory support from the SEC as well as the DOL,[15] and the potential for diversifying investment risk and enhancing investment returns for plan participants. In the coming months, fund complexes and managers of Private Market Investments will likely seek to develop products consistent with the legal and operational complexities that are inherent in managing 401(k) plan assets.

The asset management and investment funds practice at K&L Gates has decades of experience advising ERISA fiduciaries, U.S. registered investment companies, and private fund sponsors. As a single integrated team, we stand ready to help navigate the diverse regulatory issues associated with structuring investment options to access this market opportunity.

 

Notes
[1]Investment Company Institute
[2] ERISA is a federal law containing rules that plan sponsors and other fiduciaries must comply with when establishing and operating retirement plans. Company sponsored 401(k) plans and 403(b) plans sponsored by private tax-exempt employers are subject to ERISA. In this Alert, we refer to these plans collectively as 401(k) plans.
[3]Information lettersare for informational purposes only and are not binding on the DOL or any other party.
[4] The discussion in this Alert is focused on target date funds. However, the DOL’s guidance applies to other managed account structures as well.
[5] When a plan has a QDIA as the default investment option, the plan’s fiduciaries must still satisfy ERISA’s fiduciary responsibilities when selecting and monitoring the QDIA.
[6]Custom Target Date Fund (cTDF) Survey
[7] Investment Company Liquidity Risk Management Programs, Release No. 33-10233; IC-32315 (Oct. 13, 2016).
[8] Target date funds structured as mutual funds are not subject to ERISA and, therefore, do not cause their underlying private funds to be subject to ERISA.
[9] 29 C.F.R. Section 2510.3-101.
[10] Pursuant to Rule 22e-4 of the Investment Company Act of 1940, as amended (1940 Act), open-end management investment companies are required to have a liquidity risk management program reasonably designed to assess and manage liquidity risk (i.e., the risk that the fund could not meet redemption requests without significant dilution of remaining investors’ interests in the fund). The Investment Company Liquidity Risk Management Programs rule codified the SEC’s longstanding guideline limiting investments in illiquid assets for registered open-end investment companies to 15 percent.
[11] Section 2(a)(41) of the 1940 Act requires funds to value their portfolio investments using the market value of their portfolio securities when market quotations for those securities are “readily available,” and, when a market quotation for a specific portfolio security is unreliable or otherwise not readily available, by using the fair value of that security, as determined in good faith by the fund’s board of directors.
[12] Such a process would also benefit advisers of registered investment companies in the preparation materials provided to boards in response to Section 15(c) of the 1940 Act which requires that boards “request and evaluate…such information as may be reasonably necessary to evaluate the terms” of the advisory contract at issue.
[13]SeeH.E. Butt Grocery Company, SEC No-Action Letter (avail. May 18, 2001); Standish, Ayer & Wood, Inc. Stable Value Group Trust, SEC No-Action Letter (avail. Dec. 28, 1995); PanAgora Group Trust, SEC No-Action Letter (avail. Apr. 29, 1994).
[14] Section 3(14) of ERISA defines the term “party in interest” to include any fiduciary as well as any person providing services to a plan, together with certain affiliates of such a person.
[15] Chairman of the SEC, Jay Clayton, said the DOL’s letter, “will provide our long-term Main Street investors with a choice of professionally managed funds that more closely match the diversified public and private market asset allocation strategies pursued by many well-managed pension funds as well as the benefit of selection and monitoring by ERISA fiduciaries.” Secretary of Labor, Eugene Scalia, said, “This Information Letter will help Americans saving for retirement gain access to alternative investments that often provide strong returns. The Letter helps level the playing field for ordinary investors and is another step by the Department to ensure that ordinary people investing for retirement have the opportunities they need for a secure retirement.”

This publication/newsletter is for informational purposes and does not contain or convey legal advice. The information herein should not be used or relied upon in regard to any particular facts or circumstances without first consulting a lawyer. Any views expressed herein are those of the author(s) and not necessarily those of the law firm’s clients.

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Private Equity in 401(k) Plans – A Trillion Dollar Opportunity?

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India-Vision 5 Trillion Dollar Economy

India-Vision 5 Trillion Dollar Economy

THE CONTEXT:

-Prime Minister Modi had announced an ambitious target of a $5 trillion economy for India by 2024. If achieved, India will become the third-largest economy in the world.

-The focus is on boosting services sector contribution to $ 3 trillion, manufacturing to $ 1 trillion and Agriculture to $ 1 trillion.

-However, the recent economic slowdown has made critics question the ambitious target.

While delivering his 6th consecutive Independence Day speech from the ramparts of Red Fort, Hon’ble Prime Minister of India, Shri Narendra Modi ji, On 15th August 2019, expressed confidence that India would be a $5-trillion economy in 2024.

More recently, while addressing a gathering of leaders from the Corporate World, Diplomats and others, at the centenary meet of ASSOCHAM in New Delhi on 20.12.2019, the Prime Minister said that the idea of making India a 5 Trillion Dollar worth economy is not a sudden one.

“In the past five years the country had made itself so strong that it not only could set for itself such a target but also make efforts in that direction” he said. While speaking at this occasion he also listed out the allegations that were hurled at his team, but he is committed towards a new India.

Collage showing Progress and Development depicting India Rising

Earlier, in July 2019, the Economic Survey laid out a blueprint for $5 Trillion Indian economy. The Economic Survey 2019 presented by Chief Economic Adviser (CEA) Krishnamurthy Subramanian focusses on moving to a “virtuous cycle” of savings, investments and exports to transform India into a $5 trillion economy in the next five years.

Though the Vision is laudable, the growth figures do not excite a lot. India’s economy expanded by just 4.7% between July and September, it’s seventh consecutive quarter of slowing growth. The country’s GDP was growing by more than 9 percent at the start of 2016, and by 8.1 percent as recently as early 2018. Further, the number of agencies revising India’s growth estimate is increasing, with the latest being the International Monetary Fund (IMF). Most recently, The International Monetary Fund cut it’s estimate for India’s growth this year to 4.8% from earlier projection of 6.1% which was also revised from the earlier 7% projected in July, calling on the country to use monetary policy and broad-based structural reforms to address cyclical weakness and strengthen confidence. Citing a sharper-than-expected slowdown in local demand and stress in NBFC sector, the agency in it’s latest World Economic Outlook said, “The growth markdown largely reflects a downward revision to India’s projection, where domestic demand has slowed more sharply than expected amid stress in the non-bank financial sector and a decline in credit growth.”

The markdown has been the highest for India in the latest WEO projections.

In this context, many critics have questioned the feasibility of India achieving $5 Trillion Economy status by 2024. 

WHAT IS A $5-TRILLION ECONOMY?

Before we move forward, lets understand the term clearly:

  • The GDP of an economy is the total monetary (rupee) value of all goods and services produced in an economy within a year. GDP is the deciding factor among economies (countries)as to who is the largest and so on.
  • In 2014, India’s GDP was $1.85 trillion. In 2019, it is $2.94 Trillion, and India is the fifth-largest economy in the world.
  • The $5-trillion economy is the size of a national economy as measured by the annual Gross Domestic Product (GDP). If achieved, India will become the third-largest economy in the world.
  • Apart from the monetary definition, a $ 5 Trillion Economy calls for pulling all the economic growth levers—investment, consumption, exports, and across all the three sectors of agriculture, manufacturing and services.

COMPARISON WITH MAJOR ECONOMIES OF THE WORLD

  • Though India is the fifth-largest economy, but this does not necessarily mean that Indians are the fifth-richest people in the world! If one wants to better understand the wellbeing of the people in an economy, one should look at GDP per capita.
  • GDP per capita reveals a very different, and indeed a more accurate picture of the level of prosperity in the respective economy.
  • For example, while the GDP of India and UK is nearly the same, a UK resident’s income was almost 19 times that of an average Indian in 2018. Also, the GDP of Indonesia is less than India, GDP per Capita of Indonesia is almost double than that of India.

Look at GDP per capita chart below for better understanding:

GDP and GDP per capita

S.no Countries GDP $ Trillion (in 2019) GDP per Capita in $ (in 2019)
1.  India 2.94 2171.6
2.  United States 21.44 65,111.6
3.  China 14.14 10,098.9
4.  Japan 5.15 40,846.8
5.  United Kingdom 2.74 41030.2
7.  Germany 3.86 46,564.0
8.  Indonesia 1.11 4,163.8

CONTRIBUTION OF DIFFERENT SECTORS IN ACHIEVING THE GOAL OF $5 TRILLION ECONOMY

Service Sector is the largest sector of India. Gross Value Added (GVA) at current prices for Service sector is estimated at 92.26 lakh crore INR in 2018-19.  Service sector accounts for 54.40%, Secondary sector (comprising manufacturing, electricity, gas, water supply & other utility services and construction) account for 27.03 % while the Primary Sector (comprising agriculture, forestry, fishing and mining and quarrying account for 18.57 % of total India’s GVA

Primary Sector

  • Investment is the key for the flourishment of areas like agro-processing, and exports, Agri-startups and Agri-tourism, where the potential for job creation and capacity utilisation is far less.
  • Investment needs to be driven to strengthen both public and private extension advisory systems (educating farmers about technology and management practices).
  • It would also serve as a stage to demonstrate resource conservation and sustainable use through organic, natural and green methods, and also zero budget natural farming.
  • India has the highest livestock population in the world, investment should be made to utilise this surplus by employing next-generation livestock technology. This would lead to a sustained increase in farm income and savings with an export-oriented growth model.
  • Investment in renewable energy generation (using small wind mill and solar pumps) on fallow farmland and in hilly terrain would help reduce the burden of debt-ridden electricity distribution companies and State governments, besides enabling energy security in rural areas.
  • A farm business organisation is another source of routing private investment to agriculture. Linking these organisations with commodity exchanges would provide agriculture commodities more space on international trading platforms and reduce the burden of markets in a glut season, with certain policy/procedural modifications.

Manufacturing Sector

  • A three-pillar strategy has been suggested to achieve required expansion of output — focus on existing high impact and emerging sectors as well as MSMEs.
  • To boost electronics manufacturing, it said the government should consider offering additional fiscal incentives such as a limited-period tax holiday to players investing more than an identified threshold of investment.
  • Similarly, for the auto and auto–components sector, it recommended encouragement of global leaders for the identified components to set up manufacturing bases, and incentivising players willing to invest more than a threshold in identified areas.
  • The report suggested measures to boost manufacturing in other areas including aeronautical, space, garments, organic/ayurvedic products besides emerging areas such as biotechnology, electric mobility, unmanned aerial vehicles, medical devices, robotics and chemicals.
  • For micro, small and medium enterprises, the working group said there is a need to improve access to funding by way of development of SME credit risk databases, SME credit rating, and creation of community-based funds.

Service Sector

  • Services sector include improving rail connectivity and seamless connectivity to major attractions; facilitating visa regime for medical travel; allowing expatriate professional to perform surgeries in identified hospitals; and e-commerce policy and regulatory framework for logistics segment.
  • This sector contributes significantly to India’s GDP, a goal of around 60 % contribution of services sector has been envisaged for 2024. Exports and job creation, increased productivity and competitiveness of the Champion Services Sectors like IT, tourism, medical value travel and legal will further boost exports of various services from India.
  • The Commerce Minister has identified 15 strategic overseas locations where the Trade Promotion Organisations (TPOs) are proposed to be created.
  • Multi-Modal Logistics Parks Policy (MMLPs) aims to improve the country’s logistics sector by lowering over freight costs, reducing vehicular pollution and congestion and cutting warehouse costs with a view to promoting moments of goods for domestic and global trade.
  • In the defence sector, there is a need to identify key components and systems and encourage global leaders to set up manufacturing base in India by offering limited period incentives; and ensure incentives result in technology/process transfer.
  • To promote growth of accounting and financial services, there is a need to FDI in domestic accounting and auditing sector, transparent regulatory framework, and easing restriction on client base in the accounting and auditing sector.
  • Measures like exploring introduction of insurance in the film industry, promoting private investments in film schools, exploring franchise business models to exploit film franchise, and promoting gaming industry value chains aims to push audio visual services.
  • Foreign universities are allowed to set up campuses in India, easy visa regime for students and education service providers, removing regulatory bottlenecks, providing recognition of online degrees and setting up appropriate evaluation techniques for online courses for the education sector.

INITIATIVES UNDERTAKEN FOR ACHIEVING $5 TRILLION ECONOMY TARGET

The Government is working hard to realise Prime Minister Narendra Modi’s dream of making the country a five trillion-dollar economy by 2024 and has taken steps to overcome the phase of economic slowdown. The nation is witnessing a new sense of dynamism and a number of initiatives are being taken in line with Modi’s vision of ‘New India’. Principal Secretary to the Prime Minister Pramod Kumar Misra recently said that while several fundamental and path breaking reforms have been undertaken in the form of Insolvency and Bankruptcy Code and GST, continuous opening up and liberalisation of FDI have resulted in unprecedented inflows of FDI into the country. On December 13, Finance Ministry unveiled a detailed presentation on steps taken to boost economy. Chief Economic Advisor Krishnamurthy Subramanian said the government is focusing on increasing consumption to boost economic growth. Presenting steps taken by the government in the past few months to pull the economy out from a six-year low growth, he said the measures include corporate tax cuts to improve risk-return of companies.

Here’s a list of all measure announcements that were made:

1. Economic survey outlined a plan to make India $5 trillion economy with emphasis on driving up investment. On the consumption side, the government has taken steps to help the NBFCs and HFCs.

2. The govt provided support to NBFCs/HFCs under the partial credit guarantee scheme. The govt sanctioned support for Rs 4.47 lakh crore to NBFCs & HFCs which includes Rs 1.29 lakh crore for pool buyout of assets.

3. Within two days of cabinet approval, 17 proposals worth more than Rs 7,000 crore approved. Proposals worth Rs 20,000 crore will be approved over next two weeks under the partial credit guarantee scheme.

4. On investment side, the government has taken steps to boost investment, support real estate, credit expansion, corporate tax and bank recapitalisation.

5. To boost liquidity in the market, the government has cleared dues worth more than 60% of 32 CPSEs in the last two months.

6. Under the new external benchmarking scheme announced by the RBI, more than 8 lakh or Rs 72,201 crore worth of loans sanctioned under the new regime till Nov 27.

7. 66% of Budgeted capex expenditure of Rs 3.38 lakh crore has been taken so far. Higher government capital expenditure allows crowding in of private investment. April-Nov capex of 32 CPSEs is at Rs 98,000 crore. Railway and road ministries will have undertaken capex of Rs 2.46 lakh crore by December 31, he said.

8. Rs 60,314 crore of capital has been infused into PSU banks. Lenders have disbursed Rs 2.2 lakh crore to corporates and Rs 72,985 crore to MSMEs.

9. FDI inflows of $35-billion in first half of FY20 vs $31 billion in the same period last year has been achieved.

10. Rs 1.57 lakh cr tax refunded this year vs Rs 1.23 lakh cr last year: Revenue Secretary. The step will boost consumption in economy. Income tax refund up 27% so far in FY20.

11. Realty fund of Rs 25,000 crore has been created for last mile funding for stalled projects. Necessary changes in IBC made to allow projects facing insolvency to avail funds under scheme.

12. Unified regulator for international financial services enables capital flow without any hurdles.

13. Important changes in IBC: Ringfencing successful bidders of stressed assets from prosecution.

WAY FORWARD 

Going forward what steps can Government take to get closer to its target, Niti Ayog CEO Amitabh Kant recently outlined these steps.

1. Increase Ease of Business and Ease of Living to promote private investments

Over the last four years, the government has scrapped over 1,300 antiquated law! It has done away with a lot of archaic procedures, rules and regulations.

Through a series of reforms, India has jumped up 65 positions in The World Bank Ease of Doing Business. No other large country has been able to do this. India has jumped up 65 positions, but our challenge is that in the next two years India must reach the top 50 and in the next five years reach the top 25.

2. Urbanization – a big driver of growth

Cities account for less than 5% of the earth land mass, but they account for over 75 % of the global GDP! So, Urbanization in cities is important as they are centres of economic growth.   While the process of urbanization has ended across America and Europe, and matured in China, it has just begun in India. In the next 5 decades, India should see more Urbanization than what we’ve done in the last 500 years. While there will be many challenges, India needs more Urbanization to grow rapidly.

3. Globalization for growth

India exists in a globalized and interdependent world. Like in Japan, Korea and China, Globalization has helped large sections of population to be lifted above the poverty line. India’s share in global export is less than 2%. So, India must learn the art of size and scale, of manufacturing to size of scale and to penetrating.

4. Women Participation is key

India cannot grow at high rates over a 3-decade period without gender parity. In India, only 26% of the women work; the worldwide average is 48%. If such a major chunk of the population is not working and we consciously don’t put women into positions of power, it will be very difficult for India to grow.

5. Agriculture Reforms in vital

It’s not possible to grow over long periods of time without some very major structural reforms in the agriculture sector because that’s where close to 60% of India lives. You can’t keep growing on subsidies, you can’t keep going on just giving assistance to farmers without ensuring better markets, without putting technology, without contract farming and so on. Agriculture sector reforms are critical.


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‘Medicare-for-All’ program could cost $32 trillion but may also save $2 trillion

‘Medicare-for-All’ program could cost $32 trillion but may also save $2 trillion

Sen. Bernie Sanders took aim at a new report released by a conservative Koch-affiliated economic policy think tank, saying its findings “accidentally make the case” for Medicare-for-All.

“Let me thank the Koch brothers, of all people, for sponsoring a study that shows that Medicare-for-All would save the American people $2 trillion over a 10-year period,” Sanders said Monday in a video released on .

Thank you, Koch brothers, for accidentally making the case for Medicare for All! pic.twitter.com/speuEL6ETC

The report was published Monday by the Mercatus Center, a think tank at George Mason University that receives donations from the conservative Koch network and supports “market-oriented ideas.” It concludes the Sanders Medicare-for-All plan would increase federal budget commitments by about $32 trillion over its first 10 years of implementation.

Medicare-for-All, also known as single-payer healthcare, has become increasingly popular among Democrats, including progressive candidates such as Alexandria Ocasio-Cortez, who pulled off a shocking primary upset last month in New York’s 14th Congressional District and made the issue a central part of her platform.

?? My platform brings all the votes to the yard: ??

– Federal Jobs Guarantee
– Medicare for All
– Tuition-free public college
– Reduce prisons by 50%
– Defund ICE

— Alexandria Ocasio-Cortez (@Ocasio2018) April 2, 2018

The report, authored by Mercatus Center senior research strategist Charles Blahous, notes that if the Medicare-for-All plan is successful, it would lower administrative and drug costs by $2 trillion while cautioning “actual savings are likely to be less than assumed under these projections.”

“I suspect that that is not what the Koch brothers intended to do, but that is what is in the study,” Sanders said of the projected savings.

Charles Koch talks during an interview with the Washington Post at the Freedom Partners Summit on Monday, Aug. 3, 2015 in Dana Point, Calif.

Charles Koch talks during an interview with the Washington Post at the Freedom Partners Summit on Monday, Aug. 3, 2015 in Dana Point, Calif. Washington Post/Getty Images, FILE

While the Koch brothers themselves did not author the report, Koch Industries CEO Charles Koch sits on the board of the Mercatus Center. This past weekend, the Koch network held its biannual meeting in Colorado Springs, where it said it plans to rebrand itself ahead of the midterms.

(MORE: Koch network takes aim at ‘protectionism,’ slams Trump administration as ‘divisive’)

Robert Graboyes, a senior research fellow and health care scholar at the center who read Blahous’s report through its production, said the report doesn’t “predict” $2 trillion in savings.

“The paper says if Sanders’s plan fulfills everything its supporters hope it will fulfill, it will result in $2 trillion less in expenditures,” he told ABC News.

And more important, the $32 trillion dollar figure isn’t new, according to Graboyes, who says even left-leaning think tanks have come to similar conclusions.

“The Urban Institute, which is left-of-center, also found that the Sanders plan would cost $32 trillion,” he said, referring to the group’s 2016 report concluding then-presidential-candidate Sanders’s plan would have increased federal expenditures by $32 trillion between 2017 and 2026.

Sen. Bernie Sanders speaks during a health care rally on Sept. 22, 2017 in San Francisco.

Sen. Bernie Sanders speaks during a health care rally on Sept. 22, 2017 in San Francisco. Justin Sullivan/Getty Image, FILE

But Graboyes warned that, according to the report, even doubling all currently projected federal individual and corporate income tax collections would be “insufficient” to finance the costs of Medicare-for-All.

“In individual states like California and Vermont, similar single-payer healthcare plans tanked because increasing taxes was too much of a gamble,” he said.

Even doubling individual and corporate income tax collections at the federal level would fall short of fully funding Medicare for all. https://t.co/5XxJVobxj6 #MedicareForAll

— Mercatus Center (@mercatus) July 30, 2018

Josh Miller-Lewis, Sanders’s press secretary, said the additional $32 trillion is already being spent by private insurers, and the Medicare-for-All plan would simply move the money to the government.

“In the process of moving the money from private insurers to a national health care system, you’re actually saving $2 trillion by making the system more efficient,” he told ABC News.

Sen. Bernie Sanders speaks on health during an event on Capitol Hill, Sept. 13, 2017 in Washington.

Sen. Bernie Sanders speaks on health during an event on Capitol Hill, Sept. 13, 2017 in Washington. Alex Wong/Getty Images, FILE

Moreover, the fact that a conservative institute drew conclusions about the plan’s savings is a testament to the Medicare-for-All’s efficiency, according to Miller-Lewis.

“This is a right-wing think tank, and even they found that Medicare-for-All would save money compared to the current system,” he said.

Graboyes declined to comment on how Sanders was interpreting the Mercatus Center report but said he has “high respect for senators across the board.”

“I’ve never worked at a place where scholars were more independent and free of outside interest,” he said. “My fellow scholars and I subscribe to the highest academic standards.”

Even doubling individual and corporate income tax collections at the federal level would fall short of fully funding Medicare for all. https://t.co/5XxJVobxj6 #MedicareForAll

Josh Miller-Lewis, Sanders’s press secretary, said the additional $32 trillion is already being spent by private insurers, and the Medicare-for-All plan would simply move the money to the government.

“In the process of moving the money from private insurers to a national health care system, you’re actually saving $2 trillion by making the system more efficient,” he told ABC News.

Sen. Bernie Sanders speaks on health during an event on Capitol Hill, Sept. 13, 2017 in Washington.

Sen. Bernie Sanders speaks on health during an event on Capitol Hill, Sept. 13, 2017 in Washington. Alex Wong/Getty Images, FILE

Moreover, the fact that a conservative institute drew conclusions about the plan’s savings is a testament to the Medicare-for-All’s efficiency, according to Miller-Lewis.

“This is a right-wing think tank, and even they found that Medicare-for-All would save money compared to the current system,” he said.

Graboyes declined to comment on how Sanders was interpreting the Mercatus Center report but said he has “high respect for senators across the board.”

“I’ve never worked at a place where scholars were more independent and free of outside interest,” he said. “My fellow scholars and I subscribe to the highest academic standards.”


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Amazon Joins Trillion Dollar Club

Amazon Joins Trillion Dollar Club

It’s official, Apple now has company in the Trillion Dollar Club as Amazon’s stock surged past $2,000, briefly pushing the company’s total value to just over the trillion-dollar mark.

This makes the company’s CEO Jeff Bezos the richest person in the world, with a net worth estimated at around $166 billion dollars.

Amazon started out as just another internet company struggling to turn a profit. Over the years, however, the company has become a true retail powerhouse, and a disruptive force in the industry.

Some analysts predict that the company’s stock price is poised to climb even higher. Brian Nowak, (an analyst at Morgan Stanley) cities some reasons for his continued optimism. These include the company’s rapid growth, their improving business mix and their profit potential. Overall, Amazon’s total value only trails Apple’s by about $100 billion.

The last twelve months have been kind to Amazon, and the company has seen its stock price surge nearly 75 percent. The company is aggressively expanding into new businesses and finding success in doing so, which is exciting investors. Last year, for example, Amazon purchased Whole Foods Market for $13.7 billion, and recently acquired the online pharmacy, PillPack.

While there are only two members of the trillion-dollar club, there are two other companies poised to join their ranks. Both Microsoft and Google’s parent company, Alphabet are currently valued at about $850 billion. A modest nudge in either company’s stock price could push either of them into the trillion-dollar stratosphere.

Although there are a number of analysts who are excited by the stock’s future prospects, there is also some cause for concern. At current prices, the stock is trading at nearly 100 times earnings, which is nearly five times the broader market’s P/E ratio of 21. Then there’s the considerable risk that Amazon may suffer from a regulatory crackdown, given its size and dominance in the market.

Even so, it’s great news, and even better if you already own Amazon stock!

Used with permission from Article Aggregator


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Why Trillion-Dollar Coronavirus Bailouts Will Shackle The U.S. Economy

Why Trillion-Dollar Coronavirus Bailouts Will Shackle The U.S. Economy

Hot on the heels of passing an $8.5 billion coronavirus bill, the White House and congressional lawmakers have proposed yet more pork-laden coronavirus “rescue” packages with a running price tag of more than $1.3 trillion.

The Families First Coronavirus Response Act (FFCRA) passed with overwhelming support in the House of Representatives on Saturday. The Senate will likely vote to approve the legislation this afternoon.

With the help of Trump administration officials, House Democrats drafted and passed the FFCRA so quickly that the Congressional Budget Office was unable to estimate its total cost, meaning taxpayers could be on the hook financially for an indeterminate amount.

Amazingly, the FFCRA will not be the last word of the federal government on the coronavirus crisis. News broke earlier this week that the Trump administration is requesting a $1 trillion stimulus and bailout package—significantly larger than the $831 billion stimulus package passed in 2009 under the Obama administration that provoked cries of “socialism!” from conservatives everywhere.

Where Is the Money Going?

The emergency measures include a grab bag of long-sought leftist priorities. Perhaps worst of all are the two new federal paid leave mandates, lasting until the end of the year, for companies with fewer than 500 employees. The first requires companies to pay for up to two weeks of sick leave. The second provides employees three months of paid family and medical leave if their children’s school or daycare closes or if a family member is quarantined.

Since school closures around the country encompass more than half the nation’s school-children, it is not inconceivable that nearly all parents fitting the requirements might take advantage of these two new entitlement programs, both of which will be profoundly costly to businesses and the federal budget.

Businesses will be compensated for these expensive benefit mandates with money from the U.S. Treasury through a complex scheme of tax refunds administered by the IRS. Yet there remain concerns that some cash-poor businesses cannot remain solvent long enough to survive until they receive the credits. Additionally, the government reimbursement for these programs fails to consider all the costs for businesses when employees do not show up for work.

Another component of the legislation is sure to irritate welfare state reformers: the FFCRA obliterates the Trump administration’s bid to limit food stamp benefits for able-bodied adults without children. The long-planned reform, which had been slated to go into effect in April, would have strengthened the work and training requirement for some single adults collecting food stamps.

The FFCRA also expands unemployment insurance and federal Medicaid funding, and provides more than $1 billion in additional funding for food welfare programs.

Although the details of the mammoth $1 trillion stimulus package are still in flux, a Treasury Department memo suggests the newly proposed coronavirus stimulus package would give a $50 billion bailout to the airline industry. The package includes an additional $150 billion in loan guarantees to other affected industries and a payroll tax cut sure to expedite the coming insolvency of Social Security.

During a Tuesday press conference, President Trump and Treasury Secretary Steven Mnuchin announced their intention to distribute “big” direct cash payments to Americans, perhaps in denominations of $1,000 or more per person. This measure is estimated cost taxpayers $500 billion.

Bad Economic News

Here are five reasons the “Family First Coronavirus Response Act” and other coming bailout and stimulus packages are economic bad news for Americans.

Bad Precedent: Due to our human nature, we make quick studies in dependency when “free” things offered to us. These new entitlements and bailouts may prove to be the proverbial camel’s nose under the tent, just as have nearly all other welfare expansions.

Once the bad precedent is established, it is all too likely that the electorate will have a harder time resisting demands from politicians for greater government control of the economy. These “temporary” programs make permanent national sick leave and paid family leave more likely in the future.

National Debt: The debt the federal government owes currently sits at $23.5 trillion. This means every American citizen born in 2020 enters the world owing $73,500 to our nation’s creditors.

Emergency spending for the coronavirus only adds to the unconscionable level of debt we already owe. The money this nation borrows will need to be repaid through inflation or higher taxes sometime in the future.

Inflation: If taxes are not immediately raised to cover the emergency spending, the Federal Reserve will need to print new dollars—create money out of thin air—to finance these new programs.

This inflation in the money supply predictably leads to price inflation. One of the most basic economic principles is that a greater quantity of dollars chasing the same number of goods eventually results in rising prices.

Higher Taxes: Increased government spending and national debt will necessitate higher taxes for all Americans and businesses, whether sooner or later.

Lest we forget, every dollar taken from us in taxes is a dollar we cannot spend on the things we need and want. We will have to foot the bill for all this extra spending—and that comes at the price of future economic growth and a lower standard of living for everyday Americans.

Reduced Future Economic Growth: All these inflationary effects and higher taxes will inevitably hinder the growth of the economy in the future. Higher taxes make it more difficult for businesses to save and reinvest profits in expanding operations, boosting employee pay and benefits, or engaging in research and development.

Similarly, higher taxes for individuals discourages productivity and results in less household saving and investment. This means there will be less capital available for businesses to expand operations and boost productivity.

Rising productivity and profits, greater saving and investment, and more funding for research and development are all needed for robust economic growth. Economic recoveries tend to be lackluster without the necessary combination of these fundamentals.

Let us look back in economic history for a case study. During the economic troubles following the stock market crash of 1929, President Franklin D. Roosevelt’s “New Deal” relief and recovery policies created greater government interventions into the economy, ultimately with the result of reducing profits and raising taxes on businesses.

These New Deal policies exacerbated and prolonged the downturn, turning it into a “great” depression that lasted 15 years. In fact, a study by University of California at Los Angeles economics professors calculated that the interventionist policies of the New Deal elongated the Great Depression by seven years, delaying the natural market corrections and recovery that would have occurred otherwise.

Like the New Deal, every additional billion dollars in stimulus and bailout spending will further delay the economic recovery we all want and need. Ironically, these government interventions always end up aggravating the recessions and depressions they are intended to alleviate, causing even greater economic complications in the long run.

How This Affects President Trump’s Reelection Chances

In summary, the newly proposed bailout and stimulus packages smack of big government welfarism and crony capitalism. These are the sort of policies that will move the needle toward socialism, impoverishing us and stripping the productive engines of our economy.

If President Trump wants to win reelection on his economic record, he had better drop his support of this legislation, which is sure to cause lasting economic problems.

Likewise, if the president’s supporters in the Senate want a quick and sustainable economic recovery post-coronavirus, they had better gather their senses and stand firm against bailouts and stimulus packages like this economically disastrous legislation. Our financial wellbeing and the future of our liberties depend upon it.

Blaine Conzatti is a trained economist who serves as the director of advocacy for Family Policy Alliance of Idaho. He is committed to the Judeo-Christian principles of the American founding and the free market policies that empowered the growth of most prosperous and free nation in world history.


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22

Private Equity in 401(k) Plans – A Trillion Dollar Opportunity?

Private Equity in 401(k) Plans – A Trillion Dollar Opportunity?

Private equity sponsors and other managers of private market investments, including private real estate, infrastructure, and credit (together, Private Market Investments), have long cast their eyes upon the 401(k) plan market. As of 31 December 2019, employer-sponsored defined contribution retirement plans held approximately US$8.9 trillion, of which US$6.2 trillion was held in 401(k) plans and US$1.1 trillion in 403(b) plans.[1] Because of liability concerns and distinct legal and operational issues, defined contribution plans that are subject to the Employee Retirement Income Security Act of 1974, as amended (ERISA) have been reluctant to include Private Market Investments as investment options for plan participants.[2] On 3 June 2020, the Department of Labor (DOL) published an information letter that should help managers of Private Market Investments access this significant, growing market.[3] While the DOL’s letter does not open the door to direct access to Private Market Investments by 401(k) plan participants, it does provide a framework for the expanded use of private equity and, we believe, other types of Private Market Investments in managed asset allocation funds such as target date funds.[4]

The Role of Target Date Funds in 401(k) Plans

Typically, 401(k) plans offer plan participants a menu of investment options, and plan participants can select the portfolio of funds or other investments that best suit their needs. To encourage greater retirement savings, many plans automatically enroll eligible workers in the plan, unless the workers affirmatively opt out. Automatic enrollment diverts funds into a default investment (i.e., an investment into which contributions are invested absent a specific choice by a plan participant). The DOL has designated three types of “qualified default investment alternatives” (QDIAs), which, if used by the plan, provide the responsible plan fiduciary with limited protection from fiduciary liability: (i) target dated funds, (ii) balanced funds, and (iii) professionally managed accounts.[5] Target date funds—investment funds that invest in a mix of assets that shift from higher-risk to lower-risk investments over a pre-established glidepath—quickly became the most popular QDIA and, by some estimates, 401(k) plans now hold over US$2.0 trillion in retirement assets across mutual fund, collective investment trust, and separate account structures.[6] 

In the United States, target date funds are typically established as mutual funds or bank-sponsored collective investment trusts operated in a fund of funds structure. Assets classes are often exclusively comprised of public securities (bonds and equities). Target date fund sponsors offer a series of funds designed for plan participants that expect to retire in different years (e.g., 2030, 2035, 2040). 401(k) plan participants may allocate some or all of their balance to target date funds, and automatically enrolled plan participants are directed by default into a particular series based on their anticipated retirement date.

The DOL’s Guidance

401(k) plan fiduciaries have been reluctant to include Private Market Investments in a plan’s investment lineup due to legal and operational concerns. But on 3 June 2020, the DOL, which is responsible for enforcing ERISA’s fiduciary responsibility provisions, published an information letter confirming that a 401(k) plan fiduciary may offer managed asset allocation funds, including target date funds, that include an allocation to private equity while meeting their fiduciary responsibilities.

The DOL acknowledged that, as compared to the investments typically available in 401(k) plans, private equity investments tend to involve more complex organizational structures and investment strategies, longer time horizons, and higher fees. In addition, valuation of private equity investments is more complex because private equity investments often have no easily observed market value and there is often an element of judgment involved in valuing each of the portfolio companies prior to their sale by the investment fund or other liquidity event. These factors have complicated the evaluation of private equity investments by 401(k) plan fiduciaries under ERISA’s fiduciary duty provisions, which require, among other things, that plan fiduciaries evaluate 401(k) plan investment options prudently and solely in the interest of plan participants.

To assist 401(k) plan fiduciaries in navigating these matters, the DOL provided a “road map” or analytical framework for the assessment of private equity exposure in target date funds and other managed asset allocation funds. According to the DOL, in assessing the prudence of a fund that includes private equity investments, a fiduciary should consider the following matters:

  • Whether the fund offers plan participants the opportunity to invest their accounts among more diversified investment options within an appropriate range of expected returns net of fees, including management fees, performance fees, and other fees or costs that impact returns;
  • Whether the fund is overseen by plan fiduciaries (using third-party investment experts as necessary) or managed by investment professionals that have the capabilities, experience, and stability to effectively manage an asset allocation fund that includes private equity investments given the nature, size, and complexity of the private equity activity;
  • Whether the fund has limited the allocation of investments to private equity in a way that is designed to address the unique characteristics associated with such a fund, including cost, complexity, disclosures, and liquidity and has adopted features related to liquidity and valuation designed to permit the fund to provide liquidity for participants to take benefits and direct exchanges among the plan’s investment line-up consistent with the plan’s terms (in the letter, the DOL referenced the Investment Company Liquidity Risk Management Programs rule, which was adopted by the Securities and Exchange Commission (SEC) in 2016, and codified the SEC’s longstanding guideline limiting investments in illiquid assets for registered open-end investment companies to 15 percent)[7];
  • Whether the characteristics of the fund align with the plan’s characteristics and needs of the plan participants, taking into account, among other things, the fund’s investment allocation and strategy, fees and other expenses, and the nature and duration of any liquidity restrictions, a participant’s ability to access funds (e.g., loans) and ability to change investment selections on a potentially frequent basis;
  • Whether plan participants will be furnished adequate information regarding the character and risks of the fund to be able to make an informed assessment regarding making or continuing an investment in the fund; and
  • Whether the fiduciary has the skill, knowledge, and experience to make these determinations.

The DOL’s letter does not address whether or how a plan can offer direct investments into private equity. While this practice is not per se prohibited, it would raise additional legal and operational issues that plan fiduciaries would find difficult to reconcile absent additional guidance. Also, the letter does not address the complex ERISA considerations for sponsoring and operating a target date fund that includes an allocation to private equity when the target date fund is itself subject to ERISA, which is the case for target date funds established as collective investment trusts.

Considerations for Private Fund Sponsors

Managers of Private Market Investments seeking to receive an allocation of assets from target date funds should consider what structures and operational features of private funds will best meet the challenges inherent in managing 401(k) plan assets. In addition to the valuation, liquidity, and fee constraints described below under “Considerations for Target Date Fund Sponsors”, a private fund sponsor’s experience and expertise overseeing the activities of a range of Private Market investment funds as well as a fund’s “ERISA capacity” (i.e., whether a fund can have additional ERISA investors without causing the fund itself to be subject to ERISA) are important considerations.

Private Markets Investments: Private Market Investments include private equity, real estate, infrastructure, commodities, and other asset classes. While the DOL’s letter specifically references allocations to private equity, because Private Market Investments pose similar legal and operational challenges for 401(k) plans, we believe the guidance set forth in the DOL’s letter should apply more broadly to additional types of Private Market Investments.

Managers With Oversight Experience: The DOL’s letter suggests that when evaluating investment options a fiduciary should consider (i) whether plan participants will have the opportunity to invest their accounts among more diversified investment options and (ii) whether third-party investment experts and investment professionals with the capabilities, experience, and stability are involved in the management of the option. In light of this guidance, 401(k) fiduciaries may derive comfort from target date funds that obtain exposure to Private Market Investments through the oversight of seasoned fund of fund managers with expertise performing diligence on, entering into transaction with, and overseeing the activities of a range of Private Market Investment funds. These managers, whose experience and expertise would supplement the proficiencies of traditional date fund managers, could establish private funds specifically designed to complement a generic liquid portfolio, or could be engaged directly by target date funds as sub-advisers to manage a Private Market Investment sleeve of the target date fund.

Structuring and Marketing Private Market Investments: Managers of Private Market Investments seeking to develop products for the target date fund market will need to consider not only the structure of these allocation vehicles, but also the nature and scope of permissible marketing activities. Registered closed-end funds (interval funds and tender offer funds) can accommodate Private Market Investments and provide a viable path for private fund managers to access 401(k) assets. However, these funds introduce operational expenses and impediments that are not present in private funds. On the other hand, structuring allocation vehicles as traditional private funds can impair a private fund manager’s ability to highlight the services and benefits it can provide to target date fund sponsors. Private fund managers may consider as an alternative relying on Rule 506(c) of the Securities Act of 1933, as amended, which permits issuers to engage in general advertising without giving up the benefits of operating a private fund. The primary drawback of Rule 506(c)—enhanced due diligence to ensure that purchasers are accredited investors—would not be an impediment for funds designed to provide a Private Market Investment allocation to target date funds organized as registered investment companies, which are accredited investors by definition.

ERISA Capacity: Target date funds structured as collective investment trusts or separate accounts can cause an underlying private fund to become subject to ERISA (known as “plan asset” funds).[8] If a private fund is subject to ERISA, the manager is subject to ERISA’s fiduciary responsibility standards and prohibited transaction restrictions when managing and operating the fund. Because of the complexity in operating certain private funds—particularly funds that invest in Private Markets Investments—as “plan asset” funds, many funds seek to avoid “plan asset” status. This can be achieved by limiting ERISA and similar investors to less than 25 percent of each class of equity interest in the fund (known as the 25% test); complying with requirements to be a “venture capital operating company” (VCOC); or, for real estate funds, complying with the requirements to be a “real estate operating company” (REOC).[9] Therefore, managers of private funds seeking to receive an allocation of assets from a target date fund structured as a collective investment trust or separate account will need to consider whether their investment strategy can be operated within an ERISA “plan asset” fund. If not, managers of underlying private funds will likely need to limit ERISA investors to comply with the 25% test, unless the underlying private fund can be structured and operated to meet the VCOC or REOC requirements. In the alternative, Private Market Investment managers can avoid these issues entirely, if the investment vehicle can be structured as a registered closed-end fund, which is not considered to be an ERISA “plan asset” fund regardless of the type of strategy or investors in the fund.

Considerations for Target Date Fund Sponsors

Target date fund sponsors will also need to consider several legal and operational matters when designing investment products for the 401(k) market that include an allocation to Private Market Investments. The primary challenges include providing sufficient liquidity for investors and valuing investments on a daily basis.

Liquidity: As is the case for substantially all mutual funds, investment options available in 401(k) plans need to allow plans to support daily contributions and withdrawals at the plan participant level.[10] For example, a plan participant may want to (i) rollover his or her assets to an IRA, (ii) take a loan from the plan, or (iii) switch his or her investment to a different target date fund series. When a target-date fund experiences net outflows (or inflows) on a given day, the fund may need to raise (or invest) cash and rebalance in accordance with the target date fund’s pre-established glidepath. Potential solutions to these liquidity needs include:

  • Maintaining a cash buffer in the target date fund or in the fund’s allocation to Private Market Investments;
  • Including assets with a higher liquidity profile, such as listed private equity, in the Private Market Investments allocation;
  • Batch processing transactions (i.e., treating multiple buy and sell orders across different target date fund series as one transaction);
  • Drawing on a credit facility to facilitate redemptions; or
  • Raising cash by selling the target fund’s publicly traded assets.

Valuation: 401(k) plans also require daily valuation of plan investments. Private Market Investments, however, are often valued on a monthly, quarterly, or even yearly basis. To address this discrepancy, target date fund sponsors seeking to access the 401(k) market will need to establish procedures to gather relevant information to re-evaluate quarterly or monthly valuations from the underlying funds, and determine current fair valuation on a daily basis.[11]

Fee Structure: ERISA generally provides that a service provider’s fees can be no more than reasonable. In the last several years, a number of class action lawsuits have targeted 401(k) plan sponsors alleging the plan hired service providers or offered investment options that charged plan participants excessive fees. The total fees charged by a target date fund are largely based on the fees paid to managers of the underlying funds in the target date fund’s portfolio. Therefore, for legal (and commercial) reasons, sponsors of target date funds used in 401(k) plans must consider whether the underlying funds cause the overall target date fund fees and expenses to be excessive. Since the fees and expenses associated with managing Private Market Investments are typically higher than fees for more traditional and liquid asset classes, target date fund sponsors will likely want to consider setting allocations to Private Market Investments that, when blended with traditional investment products, achieve a total expense ratio that is appropriate for ERISA plans. Target date fund sponsors should also consider performing market research on the typical fee structures for Private Market Investment managers to help 401(k) plan fiduciaries understand and gain comfort that the fees charged by managers used in their funds are not excessive when compared to similar managers.[12]

Securities Law Issues: Target date managers should be aware of the issues that may arise when 401(k) plans invest in private investment funds that rely on the Section 3(c)(1) or Section 3(c)(7) exceptions under the 1940 Act. Section 3(c)(1) applies to a fund whose outstanding securities are owned by not more than 100 persons and Section 3(c)(7) applies to a fund whose outstanding securities are owned exclusively by “qualified purchasers” (as defined by the 1940 Act). In certain cases, funds need to look through to the beneficial owners of an entity participating in the fund, such as the participants in a 401(k) plan, for purposes of compliance with the 100-investor limit or the qualified purchaser requirement. A series of SEC no-action letters provides that a fund does not need to look through a 401(k) plan to the plan participants for these purposes, as long as the fund limits its investment in Section 3(c)(1) and Section 3(c)(7) funds to not more than 50 percent of the fund’s assets, the manager of the fund determines when and how much to invest in particular underlying Section 3(c)(1) and Section 3(c)(7) funds, and the fund does not represent that it will invest in particular Section 3(c)(1) and Section 3(c)(7) funds.[13]

Target Date Funds as “Plan Asset” Entities: Decisions relating to the design of a product to be offered to ERISA plans should not be viewed as fiduciary decisions subject to ERISA’s fiduciary responsibility requirements. However, if a target date fund is an ERISA “plan asset” entity, such as a fund structured as a collective investment trust, the target date manager is subject to ERISA’s fiduciary responsibility standards and prohibited transaction restrictions when managing and operating the fund. Managers of such funds should consider their duty to avoid non-exempt prohibited transactions under ERISA, such as transactions between the fund and a “party in interest”[14] of plans investing in the fund and economic or other benefits flowing to the target date manager or its affiliates (e.g., additional fees) as a result of a decision by the target date manager to cause the fund to enter into a transaction. Managers should carefully consider whether compliance with a prohibited transaction exemption, such as DOL prohibited transaction exemption 84-14 or 91-38, or other steps are advisable to avoid prohibited transactions.

We believe the DOL’s letter provides a helpful analytical framework to assist plan fiduciaries in selecting and monitoring target date funds that include an allocation to Private Market Investments. In time, the DOL’s letter should help level the playing field between defined benefit pension plans, which invest hundreds of billions of dollars in Private Market Investments, and 401(k) plans, which rarely invest in Private Market Investments.

We anticipate continued interest and developments in this area due to the vast market opportunity for managers of Private Market Investments, regulatory support from the SEC as well as the DOL,[15] and the potential for diversifying investment risk and enhancing investment returns for plan participants. In the coming months, fund complexes and managers of Private Market Investments will likely seek to develop products consistent with the legal and operational complexities that are inherent in managing 401(k) plan assets.

The asset management and investment funds practice at K&L Gates has decades of experience advising ERISA fiduciaries, U.S. registered investment companies, and private fund sponsors. As a single integrated team, we stand ready to help navigate the diverse regulatory issues associated with structuring investment options to access this market opportunity.

 

Notes
[1]Investment Company Institute
[2] ERISA is a federal law containing rules that plan sponsors and other fiduciaries must comply with when establishing and operating retirement plans. Company sponsored 401(k) plans and 403(b) plans sponsored by private tax-exempt employers are subject to ERISA. In this Alert, we refer to these plans collectively as 401(k) plans.
[3]Information lettersare for informational purposes only and are not binding on the DOL or any other party.
[4] The discussion in this Alert is focused on target date funds. However, the DOL’s guidance applies to other managed account structures as well.
[5] When a plan has a QDIA as the default investment option, the plan’s fiduciaries must still satisfy ERISA’s fiduciary responsibilities when selecting and monitoring the QDIA.
[6]Custom Target Date Fund (cTDF) Survey
[7] Investment Company Liquidity Risk Management Programs, Release No. 33-10233; IC-32315 (Oct. 13, 2016).
[8] Target date funds structured as mutual funds are not subject to ERISA and, therefore, do not cause their underlying private funds to be subject to ERISA.
[9] 29 C.F.R. Section 2510.3-101.
[10] Pursuant to Rule 22e-4 of the Investment Company Act of 1940, as amended (1940 Act), open-end management investment companies are required to have a liquidity risk management program reasonably designed to assess and manage liquidity risk (i.e., the risk that the fund could not meet redemption requests without significant dilution of remaining investors’ interests in the fund). The Investment Company Liquidity Risk Management Programs rule codified the SEC’s longstanding guideline limiting investments in illiquid assets for registered open-end investment companies to 15 percent.
[11] Section 2(a)(41) of the 1940 Act requires funds to value their portfolio investments using the market value of their portfolio securities when market quotations for those securities are “readily available,” and, when a market quotation for a specific portfolio security is unreliable or otherwise not readily available, by using the fair value of that security, as determined in good faith by the fund’s board of directors.
[12] Such a process would also benefit advisers of registered investment companies in the preparation materials provided to boards in response to Section 15(c) of the 1940 Act which requires that boards “request and evaluate…such information as may be reasonably necessary to evaluate the terms” of the advisory contract at issue.
[13]SeeH.E. Butt Grocery Company, SEC No-Action Letter (avail. May 18, 2001); Standish, Ayer & Wood, Inc. Stable Value Group Trust, SEC No-Action Letter (avail. Dec. 28, 1995); PanAgora Group Trust, SEC No-Action Letter (avail. Apr. 29, 1994).
[14] Section 3(14) of ERISA defines the term “party in interest” to include any fiduciary as well as any person providing services to a plan, together with certain affiliates of such a person.
[15] Chairman of the SEC, Jay Clayton, said the DOL’s letter, “will provide our long-term Main Street investors with a choice of professionally managed funds that more closely match the diversified public and private market asset allocation strategies pursued by many well-managed pension funds as well as the benefit of selection and monitoring by ERISA fiduciaries.” Secretary of Labor, Eugene Scalia, said, “This Information Letter will help Americans saving for retirement gain access to alternative investments that often provide strong returns. The Letter helps level the playing field for ordinary investors and is another step by the Department to ensure that ordinary people investing for retirement have the opportunities they need for a secure retirement.”

This publication/newsletter is for informational purposes and does not contain or convey legal advice. The information herein should not be used or relied upon in regard to any particular facts or circumstances without first consulting a lawyer. Any views expressed herein are those of the author(s) and not necessarily those of the law firm’s clients.

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