Happy New Year 2017

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The Impact of Demonetisation

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Irrespective of the political divide, the announcement on Nov 8, 2016 by Prime Minister Modi to demonetise Rs 500 and Rs 1000 currency notes has led to heated debates at private gatherings, social media and WhatsApp groups. Bringing forth the citizen’s divide in a stark manner, “damn if you agree and damn if you don’t”.

Besides the citizens, the political class too is deeply divided. Political expediency demands that they support the government’s move against black money drive but question it’s ill-planned execution. Those in opposition have argued that the demonetisation drive will not stem out black money from the system. But one argument that holds sway is the almost total elimination of counterfeit currency, at least for the moment.

Cashless state of existence

Of the Rs 16.4 trillion ( Rs 16.4 lakh crore) currency in circulation, Rs 500  and Rs 1000 form the bulk of the currency notes in the financial system.

ü  They amount to a little over 86% of the total money in circulation i.e. Rs 14.2 lakh crore, in 2015-16.

ü  The Rs 500 notes amount to Rs 7.9 lakh crore and Rs 1000 notes amount to Rs 6.3 lakh crore as per the Reserve bank of India.

The sucking out of 86% of the total currency in circulation is bound to have its naysayers and apologists. The sheer scale of it dwarfs similar attempts made across the globe in the past. Only time will tell, whether the exercise was one of futility or a turning point in the history of India.

ü  The bulk of transactions in India are still carried in cash. As per an estimate in 2012 by the Fletcher School at the Tufts University in the United States, “India is cash intensive, even for a developing country”.

ü  The value of notes and coins in circulation in the economy, as a percentage of GDP is 12.2% for India (world norm is just 5% Currency to GDP ratio). Higher than Russia (11.9%), Brazil (4.1%) and Mexico (5.7%)

ü  The ratio of money held in bills and coins (Mo) to the amount held in demand deposit and savings account (M2) in India is 51%, higher than Egypt (29.3%), South Africa (8.9%), and Mexico (8.7%).

ü  Despite a leading exporter of technology services, a well-developed financial market and a fiercely competitive telecommunication market – less than 2% of Indians have used a mobile phone to receive a payment, compared to over 60% of Kenyans and 11% of Nigerians.

ü  Of the total consumer payment transactions, 86.6 per cent of the  transactions by value were carried out in cash in 2012. Card transactions in comparison stood at 4.1 per cent of the total transactions, and 6.8% for the electronic /ACH transactions.

But then an exercise of such magnitude is bound to have its own set of challenges. Besides economic, political risks too are huge. A forced system reboot will have its own consequences but it may fast track the effort of the government to direct its citizens to opt for non-cash payment modes. A cashless or less cash society was necessary to control terror funding and reduce the availability of avenues for black money generation.

Though the obvious effort, as perceived by the public, is the stemming of black money, there are other benefits that will accrue due to this surprise move of the government. The effort of the government seems to be multi-pronged.

India’s Shadow Economy and Elimination of Counterfeit Currency

ü  As per official estimates, the fake currency circulating in India is around Rs 400 crores. Demonetisation hits the counterfeit currency racket the hardest, and puts a brake to terror funding from across the border. Only in the months ahead will the true impact of demonetisation on terror funding and counterfeit racket be known.

ü  As per World Bank estimates, India’s shadow economy accounted for 23% of GDP in 2007.

ü  Between 2002-2011 Indians illicitly sent assets abroad worth US$343bn (16% of GDP)

Recapitalisation of Banks

The money coming into the system, if not taken out, will enable the government to recapitalise the banks. Flush with liquidity, banks would thus be able to lend more to stimulate economic activity.

Improvement in fiscal position

ü  Direct tax collections to rise as funds earlier unaccounted for, now enter the banking system and are taxed.

ü  Increased tax collections would give the government more room to fund infrastructure without having to compromise on its budget targets.

ü  Post 30th Dec 2016, RBI will have to account for the currency notes that have lost their legal tender and have not been deposited with the banks. This reduction in liability of the RBI can lead to it issuing more currency, thus stimulating economic activity, without worrying about the inflationary impact of such a decision. With only 1% of the Indian populace paying taxes, the move is expected to increase tax revenues for the government.

Rate reduction

As the economy/demand falters, consumer price inflation is further expected to ease from a 14-month low of 4.2% in October 2016 ( a new low since August last year). The RBI, in such a scenario, would be better positioned to cut rates and the transmission of rate cuts to consumers too is expected to be quicker, this time. Bonds are expected to further rally in a downward rate cycle.

Real Estate Valuations

Real estate prices in India, despite the recent correction, are still very expensive by most standards. And they are expected to further correct post the demonetisation move of the government. However lots still needs to be done on this front due to the builder/neta nexus over the years. Besides the stated focus on benami properties, the govt needs to also focus on the lending mechanisms of the public sector banks to this sector. If the government is serious about cracking down on this sector, prices will further drop.  This scenario will however, have its own set of problems.

ü  Were NPAs of this sector to rise due to the slowdown and fall in prices, India will be faced with another problem due to the nature of dual financing to this sector (most buyers are not aware of this potential problem). Dual financing is where the same property/asset has been offered twice as a collateral.

ü  Example: A builder may have mortgaged the land, on which the project is being constructed, to a bank to raise funds for construction. And you as a buyer too would have taken a home loan against the apartment booked in the same project. Were the builder to default on the loan outstanding, the first charge is created in favour of the bank that first gave the loan to the builder. You as an apartment buyer would thus be helpless to claim your right – leading to total legal and financial mess for the individuals who had booked their homes with the concerned builder.

In brief:

Year 2016 has been a year of surprises! First there was Brexit, then the Donald Trump victory and the Indian demonetisation announced on the same day. Were the demonetisation effort to fail, India my not be so lucky as the timing of this move may have come at an inopportune moment. The capital goods production has been falling for the last eleven months on a year-on-year basis.

Demonetisation is a high risk gamble taken by Modi. While the short term distress in the economy is understood,

Ø  Cash clean-up will impact real estate and jewellers the hardest as a major part of their business is in cash

Ø  Rural consumption is expected to be hit hard thus impacting the overall sentiment in the financial markets

Ø  As payment cycles get stretched, agriculture, SMEs, MFIs could be potentially impacted

Ø  The saving grace for industrial production in India has been consumer goods, but that is now all set to change.

Ø  With 86% of all consumer payments conducted in cash, disruption here is immense. GDP growth to be impacted for at least the next few quarters.

The long term impact may surprise us with the positives of this move.

Ø  As the formal economy prospers, government’s tax revenue to improve significantly.

Ø  A huge positive for the banks especially private sector banks as legitimate sources of money come back into the system.

Ø  Though India’s tax to GDP ratio at 16.6% is low compared not just to OECD average of 34% but also emerging market economy average of 21% (Source: TOI/Mint), tax compliance to go up significantly due to a combination of demonetisation, GST and host of other steps being planned by the government.

Markets will likely be cheaper over the next few quarters as corporate earnings are expected to disappoint on the back of delayed spending. In the debt space, yields have come down sharply as there is now increased scope for rate cuts both by RBI as well as in the transmission of lower rates by the banking system. Credit selection would thus become critical in the current environment.

On the global front, the combination of US election outcome and expectation of Fed rate hike in December is leading to a big bond selloff impacting global markets and emerging market currencies. Rate hike in the December FED meeting is seen as highly likely. India remains relatively un-impacted by US elections as Indian 10 Year bond has seen a rally owing to demonetization measures taken by the government. Cash crunch due to demonetisation has led to lower demand in many sectors of the economy.

In conclusion, the ultimate impact of demonetisation will only be revealed over time once the initial chaos settles down.

Investing in India Versus the West

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How India looks like for overseas investors at a time of global uncertainty, as explained by economics and NRI expert Kul Bhushan.

Dear overseas Indian investor, where will you keep your money safely? In the UK? Really, after Brexit and the emerging economic slide?
In the USA? What with its huge deficit, debt and slow economy.
Perhaps anywhere in the west, then? What about the almost negative rates of interest after you deduct inflation from your returns? Add to that the global political scenario getting bleaker with increased violence.

So let’s face it, India is the best bet right now. In the current global economic slowdown, India is the fastest growing economy with over seven per cent growth.

The passing of the constitutional bill for goods and services tax (GST) on 3 August 2016, marked a historic day in the economic history of the nation. As a major economic reform post the liberalisation of 1991, the passage of the GST bill will finally lead to the realisation of the ‘One Nation One Market’ dream.

Flipkart co-founder Sachin Bansal calls GST ‘Brexit in reverse’ which means that while Britain left the bigger market of Europe, India has created its own bigger single market for goods and services.
This means extra economic growth estimated at between two and three per cent after the bill comes into action which is targeted for 1 April 2017.

“This is India’s biggest single tax reform since independence,” wrote an Indian management consultant settled in the USA.
Simply put, GST is a single tax on goods and service that includes VAT, service tax, central sales tax, excise duty, entertainment tax, additional customs duty, special customs duty, octroi and entry tax, purchase tax, luxury tax, and taxes on lottery, betting and gambling, and many other taxes at the state level.

GST will simplify the taxation system, bringing in more revenues and efficiency. But how does it all impact the overseas Indian investor?
Higher economic growth means better returns for investment. India seems to be at the cusp of a new era of economic growth and development and this bodes well for investors to look at equity investments as a powerful tool for long-term wealth creation.

When overseas Indians deposit their savings in India, they can expect higher returns than in the west.
When they invest in equities or mutual funds, they can hope for even better returns as the market will become more bullish and when they invest in industry, the single market could bring in higher profits.

The real test of GST will however lie in its implementation. The digital infrastructure for collecting GST is claimed to be in place but tax officials will have to be re-trained by April 2017.
If India fails in the proper implementation of GST, then it may result in little or no benefit in economic growth and lower inflation.
But chances are that the Modi government – which worked hard to get GST passed – will make it a success. And that makes India the top destination for diaspora funds and investment.

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What Women Want… on Wall Street

At last, here’s a movie that portrays women taking on the male-dominated world of Wall Street. Equity, directed by Meera Menon, revolves around Naomi Bishop (played by Anna Gunn), a seasoned female investment banker holding her own in the fiercely competitive world of big money.
“For me, I guess the simplest answer is, I like money”, Bishop honestly states when asked what makes her really get up in the morning.

Equity has been getting positive reviews with one critic hailing it as “the she-wolves of Wall Street”.
The fact that there’s never been a female CEO at any of the 22 largest U.S. investment banks says a lot about gender inequality in finance. The irony couldn’t be more obvious at a time when Hilary Clinton has become the first U.S. female presidential nominee.

Equity is not only correcting that imbalance on-screen but also behind the camera. The film’s leading producers are women as are the scriptwriters, while the mostly female-led cast is directed by a young Indian American woman director.

“The film is about women in power and their relationship with money,” Menon said in an interview. “All of these things are newer to explore because they’re not necessarily things that historically women have been associated with.”

As Bishop says in the film, “I am so glad its finally OK for women to talk about success.”
It’s the kind of line that should inspire women worldwide to shatter the glass ceiling once and for all.

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It’s Time for Indian Women to Just Do It


A new commercial by Nike has thrown the spotlight on India’s sportswomen, using sports as a trigger to boost female empowerment.

In a break from the typical alpha-male dominated imagery seen in most sports advertising, the Nike India commercial features a cast of over 160 girls such as one of the world’s youngest fully trained Stott Pilates instructors, Namrata Purohit, footballer Jyoti Ann Burrett and cricketers Harmanpreet Kaur, Smriti Mandana and Shubhlakshmi Sharma, in addition to other sports practitioners.

Major star power is added by the likes of tennis star Sania Mirza and former national-level badminton player turned actress Deepika Padukone.

The music-driven ad titled “Da Da Ding” is inspired by sociological findings that suggest that “female participation in sport helps to alter a girl or woman’s self-image in numerous ways, including feelings of control, competency and strength,” according to a statement from Nike.

For example, Rani Rampal, who in 2010 at the age of 15 became the youngest player on India’s national field hockey team, says that sports helped build her self-assurance and expand her dreams: “Coming from a small village never stopped me; every time I won a medal I kept getting stronger and more confident to take on the world.”

Given that women have traditionally remained under pressure to live up to outdated expectations – be it in how they look or what careers they choose – India’s sportswomen can fuel a new wave of much-needed female assertiveness.

An assertiveness that also reflects how they earn, save and invest their money.

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Female Leadership + Fintech = Financial Revolution

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The world of finance has traditionally been a male domain but Indian women are smashing through the glass ceiling to emerge as leaders, especially in banking. This management revolution is happening at a time when fintech, or financial technology, is rapidly changing India’s financial ecosystem.

Some of India’s leading banks are headed by women such as Arundhati Bhattacharya (SBI), Chanda Kochhar (ICICI), Shikha Sharma (Axis Bank), Usha Ananthasubramanian (Punjab National Bank), Naina Lal Kidwai (HSBC) and Kaku Nakhate (Bank of America Merrill Lynch India), among others.

This trend is indeed ground-breaking indicating that India is at par, if not ahead, of many countries when it comes to gender equality in banking.

A report in The Quint suggested that some of the reasons why women have made such an impact include their ability to be natural team players, multi-taskers and flexible managers while adding that “women also traditionally tend to be more careful with money”.

Taking an international view beyond banking, a recent study by the Centre for Financial Research at the University of Cologne indicated how women approach financial management. The study indicated that female fund managers switched around their portfolios less than their male colleagues. An analysis on Investopedia offers further insight on “the unique ways women approach finance”.

With women heading some of India’s top banks coupled with the growing impact of fintech, it should be no surprise if the country is heading for a financial revolution. A recent report by KPMG India titled “Fintech in India” states that “the traditionally cash-driven Indian economy has responded well to the fintech opportunity, primarily triggered by a surge in e-commerce, and smartphone penetration.” The transaction value for the Indian fintech sector is estimated to be approximately US$ 33 billion in 2016 and is projected to reach US$ 73 billion in 2020 growing at a five year CAGR of 22 percent.

With banks targeting the millennial audience – India has the world’s youngest population with over 350 million people below the age of 24 – fintech is expected to play a major role in attracting this crucial demographic. Moreover, with 277 million internet users, India has just overtaken the U.S. to emerge as the world’s second largest internet user after China.

In other words, fintech powered with female leadership can give India a unique standing in the global financial market while giving you, the consumer, better options on how to manage your money.

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Girls Just Want Equal Funds

Popstar Cyndi Lauper delivered a serious message demanding equal pay for women by reworking the lyrics of her classic 1983 hit “Girls Just Wanna Have Fun”.
Appearing on the Late Late Show With James Corden recently, Lauper retitled the song to “Girls Just Want Equal Funds.”

The revised lyrics went like this: “I come home in the morning light/ My mother says ‘Why don’t you make the same as a guy?’/ Oh mama, dear, we’re not the fortunate ones/ ‘Cause girls, they want equal funds.”

Still reflecting the same impish charm as she did back in the day, Lauper had another message for men: “If you ask us for a date, oh boys be ready to pay / we’ll get the check when we make the same.”

The raging debate over gender pay gap is a worldwide trend affecting both rich and poor countries alike.
In India, men earned a median gross hourly salary of Rs. 288.68 while women earned Rs. 207.85 per hour according to the latest Monster Salary Index by online recruitment website Monster India. The report also shows that gender pay gap disparity stands at 27% in the country.

While it is still high, the gap has narrowed in recent years. According to a study by Paycheck.in (an initiative of IIM Ahmedabad), the average gender pay gap was approximately 54% from 2006 to 2011.

India’s current 27% pay gap is close to the U.S. where it stands at 25%.

According to a World Economic Forum global gender gap report, India ranks 108th in the world (out of 145 countries surveyed) with a 0.664 ranking. Iceland tops the survey with a 0.881 ranking, closest to 1 which represents total equality.

The report also adds that since 2006, an extra quarter of a billion women worldwide have entered the labor force. And yet, the annual pay for women only now equals the amount men were earning TEN YEARS AGO.

So kudos to Cyndi Lauper for demanding equal funds for girls!

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