Monthly Archives: November 2016

Thursday Trivia – Demonetization understanding the impact

Demonetization

Evening of November 8, 2016 marked another bold move by our Government and Reserve Bank of India (RBI).  While everyone were recovering from their long and tiring day, Prime Minister Narendra Modi gave a mild shock by simply removing currency notes of ₹ 500/- and ₹ 1000/- effective midnight.  It was a strike of armageddon because only 4 hours were left to exchange them for other currency notes.  Long queues were spotted majorly at ATM branches, jewellery shops and petrol pumps.  Why petrol pumps, since everyone wanted to simply spend any extra notes which they had.  Every social media page was filled with songs of praises of our Prime Minister.  It sounded as if he delivered a trio of Satyam Shivam Sundaram, by tackling the issue of black money, corruption and terrorism.  Once again, everyone was as happy as the day we woke up to find Indian army had committed surgical strikes. Also, for some time attention of elections held in United States of America was diverted to currency demonetisation.

 

This is not a one way street, Government will re-introduce the currencies of ₹ 500/- and ₹ 2,000/- in 2017. While ₹ 1,000/- rupee note will be kissed a good bye mostly forever.

 

Is it really the first time, RBI has attempted a currency demonetisation? Well certainly not. There were 2 times when a similar action was taken.

 

  1. In January 1946, currency notes of ₹ 1,000/- and ₹ 10,000/- were withdrawn under the leadership of British India.
  2. Second time, it was under the leadership of then Prime Minister Morarji Desai, currency notes of ₹ 1,000/-, ₹ 5,000/- and ₹ 10,000/- were withdrawn on January 16, 1978.

 

One may argue, that such an exercise has already been done twice in history and still India had a massive parallel economy of black money.  How is this one so different?  Will this also be a failed attempt or third time is a charm? Only time can give that answer, right now we can just try and rationalise the impact of this decision.

 

In the previous 2 attempts, usually the unaccounted wealth was considered to be had with super rich. They would not really keep such money with them and spend it or stash it away in their foreign bank accounts.  This time, the unaccounted wealth can be freely measured everywhere as most people do not pay proper taxes pinching a whole into those who pay them. Especially the salaried class, has the most impact because their taxes are deducted even before the cash is deposited in their banks. With prices going up of bare minimum necessities, they feel the burn.

 

For now, let’s consider the impact of this decision :

 

  1. Corruption and Black Money : The impact on black money usage maybe little because those who deal in it will eventually move to ₹ 2,000/- currency notes. A lot of unaccounted money also lies in real estate, gold and other physical commodities. But a fear of government tracking it such unaccounted wealth is far more important as income tax department will easily track these deals once the payments are through.
  2. Counterfeiting : The impact on counterfeit notes will be massive. As dealers with existing counterfeit notes would be stuck.  They will not be able to take it bank and change it, so they will have to eventually burn their money incurring huge losses. Terrorism which is funded through such notes will have a huge impact as they will have to build a new technology that would print new currency notes.
  3. Cashless Society : In the long run, this move will prove a very significant ground for going cashless. I am sure, many people who are already living on a cashless life and transacting their money through internet were the happiest. This will ensure complete accountability in the system and we will get our hard earned money’s worth.
  4. Inflation : When there is a lot of unaccounted wealth in an economy, there is a price rise because people who hoard such money can pay for their luxuries and in turn raising the price of necessities. This creates a massive impact on those who account their wealth and pay taxes on time. Prices continue to rise of mere necessities as everyone wants their homes to run. When such unaccounted wealth is brought into the system, government can spend enough money to cool down the prices. This in turn will reduce inflation too.
  5. Banking for all : Under Jan Dhan Yojana, a lot of new bank accounts were opened. Now, these new accounts would be used to deposit old notes and banks will issue them fresh notes with the same. This means, Indians will start taking their steps towards understanding the banking system. It will eventually help the Government in framing better structures for the whole country.
  6. Inconvenience : As the window of opportunity to convert existing ₹ 500/- and ₹1,000/- rupee notes to ₹ Rs. 100/- and below was only 4 hours and banks were closed the following day. This caused a little inconvenience for those who had not anticipated such an unprecedented move. This caused a little shift in planning their expenses, but everyone knew that such a move is beneficial for them in future years.
  7. Increase in loans and advances to SME sector : One of the reasons why ex-RBI Governor Dr. Raghuram Rajan was not lowering interest rates was low deposits in banks and in exchange higher stressed loans. There was a wide criticism that because the interest rates were so high, businesses could not afford taking loans. This will change as we will see good amount of deposits which will provide a cushion for banks to give more loans. In turn, more Small and Medium Enterprises will get funding to expand their production capacities. Goods produced and sold in India will attract cheaper selling prices than goods produced outside India.

 

As more money will start to get accounted for, India will see it’s own form of deleveraging which other developed countries such as United States of America, Europe and China are struggling to do in last 5-6 years.

 

Let’s now simply look at our to-do list in the next few days to arrange our finances.

  • First of all, don’t panic and don’t worry.
  • There is a limit for exchanging your currency. Upto ₹ 2000/- per day (from 18th November) with a valid ID proof (Aadhar card, PAN card or Passport).
  • The above limit will be reviewed by RBI on a regular basis.
  • Withdrawals from ATM are limited to ₹ 2,500/- per day per card until further review.
  • Cash withdrawal from a bank account, over the counter is restricted to ₹ 24,000/- per week.
  • No-restriction on the use of non-cash method of operating the account such as cheques, demand drafts, credit / debit cards, mobile wallets and electronic fund transfer mechanism.
  • To avoid any inconvenience in emergency situations till November 24, 2016, old currency notes are accepted at :
    Government Hospitals and Pharmacies in the Hospitals
    Railway Ticketing counters
    Ticketing counters of Public Sector undertaking buses
    Milk booths
    Cremation / burial grounds
    Petrol / Diesel / Gas stations
    Airport ticketing counters and Forex counters upto a limit

 

There are enough options available for exchanging old currencies.  So it would be better not to worry and just work with our Government to help them bring this change.  It has been generally seen that, most people over-estimate the impact of change in the short run and under-estimate the impact in the long run.  So let’s not entertain endless discussions on this subject because it will not solve any purpose.

 

Image courtesy : PMO India

 

Thursday Trivia – Is financial planning this simple?

Investing for a Dream / House!

Ever thought of buying a house?  What a silly question, isn’t it?  Of course, if we don’t have a house, then it’s always on our mind.  Even if there is one house, a second house is also a distant thought which is stored somewhere in the subconscious.  The adrenaline rush of having a personal house or having 2 houses either in the same city is an amazing feeling.  Just a look at an empty slot of land, dreams about having a life in that house become reality.  Kids playing in the garden, parking spot for cars, family and friends coming over for a party and spending those quality quiet moments alone or with a loved one.  Don’t some of these things happen to you as well?(Just to be clear, this article is not to discourage any reader from buying a house)

house

Image Courtesy : houseplans.com

Simply, ask a question to yourself that what is all this if not ‘planning’?  Isn’t there a plan being put in place through vivid imaginations about how life will turn out if money is invested in the house?  If Yes, then let’s go to another part of the story – ‘Investment’.

It certainly takes money to buy a house.  So what is there isn’t enough money? There is always a bank, right?  Loans can be drawn against business income or salary for buying a house.  What a great relief! Now, dreams can become a reality.  Banks pay that money for us to the seller of the house and in return we pay in installments to the bank over a period of time. Because of this great gesture by bank, we also agree to pay additional money as gratitude in the form of interest to the bank.  Slowly and gradually, every month in a systematic fashion the loan is paid off, giving us feeling of relief and pride. House is now completely free from any loans and an asset is created which will secure generations to come.

Wasn’t this investment planned in the most systematic fashion?  Expectations were clearly set for everyone.  Even if there was a miss out on one monthly installment then bank would impose a penalty.  If the relationship with the bank became better during the course of loan, then the same bank would become a default choice for the purchase of second house.

But when it comes to investment in an investment product other than house, it certainly raises great deal of speculation.  Whether it would be wise to give away our current comforts of life to invest our money which might or might not grow in the future?  Or, why to invest money for future, when life happens now? These are two broad range of thoughts that arise, there could be a more streamlined speculative thoughts towards the same. The biggest fear always comes, investing in stock market is too risky and the money can just completely go away as well.  (These days the fear of 2008 crash is still fresh in our minds.)

Fear in such a scenario is quite real. Unlike while buying a house, no institution pays an upfront money which can be later on paid back in parts.  On the contrary, the money is invested right now with no guarantee of giving a return while the risk being present for it to diminish in value.  Boom!!!!

Let’s look at a real life example of a mother who wanted to by a motorcycle for his younger son.  Every month she used to keep some money aside from the household expenses.  She followed the activity religiously over 2 years and could gather Rs. 50,000/-.  Since the younger son wanted a motorcycle worth well above Rs. 1 lakhs, it was still a distant dream for her.  One day, her elder son came to her and requested that money to start a business.  Being a mother, she quickly gave her money saved and told him that this money is marked for buying a motorcycle 2 years down the line, so he better take good care of it.  Initially, the business went into some trouble and the elder son requested for more money and his mother gave him the money saved which would have otherwise added to buy a motorcycle.  Over the course of next 6-8 months, business of the elder son began improving. Within a year, the elder son gave back the money to his mother with some profits which he had accumulated in his business. That amount was well above Rs. 1 lakhs and enough for the purchase of a motorcycle for the younger son.  Her dream became a reality far before it she had dreamed about. An asset was created without taking a loan!

bike

Image Courtesy : Royal Enfield

Isn’t this almost similar when we put our money in an investment product? Just the striking difference being that she had complete confidence on her elder son that he will stand on her expectations.  Money put into an investment product will be serving a business which will in return reward that investment with a share in their profits.  Now, since we can’t sit to understand each and every business and it’s challenges, it’s best to pick up an investment advisor who does.  Just set the expectations right and allow some time for your expectations to pay off.

Just a food for thought – what if you have an investment advisor who will your expectations? An investment advisor who treats your money with like his own and invests with great concern so that the goal of retirement, education of children, marriage of children, etc. could be easily taken care of without going to a bank. Won’t that serve you as a chocolate mousse with a cherry on the top?