Demonetization: Misconceptions, problems and solutions

The biggest voice I have been hearing nowadays in India (since Nov 8, 2016, when the Indian Prime Minister Narendra Modi declared Rs. 500 and Rs. 1000 notes as illegal tender of currency from the next midnight i.e. with just 4 hours’ notice) is that it is ‘Unconstitutional’ to Demonetize the currency, especially when there was a limit put on cash withdrawals on the ‘Savings accounts’. So I thought it would be better to understand what it means by ‘Savings Accounts’ or ‘Demand Deposits’

Definition of ‘Savings accounts’
A savings account is an interest-bearing deposit account held at a bank or another financial institution that provides a modest interest rate. Banks or financial institutions may limit the number of withdrawals you can make from your savings account each month, and they may charge fees unless you maintain a certain average monthly balance in the account. In most cases, banks do not provide checks with savings accounts.
_{Read more: Savings Account Definition | Investopedia http://www.investopedia.com/terms/s/savingsaccount.asp#ixzz4TG5IHZn5  Follow us: Investopedia on Facebook}
Savings accounts offer limited use of the funds in the account because they are generally not available for paying bills or buying items directly via checks or debit cards. Some accounts have Internet access, which can be used to move money from the savings account to other accounts, but some savings accounts require the account holder to physically go to the bank in order to deposit or withdraw money.
_{Courtesy: http://www.livestrong.com/article/58780-definition-savings-account/}
These deposits accounts are one of the most popular deposits for individual accounts. These accounts not only provide cheque facility but also have a lot of flexibility for deposits and withdrawal of funds from the account. Most of the banks have rules for the maximum number of withdrawals in a period and the maximum amount of withdrawal, but hardly any bank enforces these. However, banks have every right to enforce such restrictions if it is felt that the account is being misused as a current account. Till 24/10/2011, the interest on Saving Bank Accounts was regulated by RBI and it was fixed at 4.00% on daily balance basis. However, w.e.f. 25th October, 2011, RBI has deregulated Saving Fund account interest rates and now banks are free to decide the same within certain conditions imposed by RBI. Under directions of RBI, now banks are also required to open no frill accounts (this term is used for accounts which do not have any minimum balance requirements). Although Public Sector Banks still pay only 4% rate of interest, some private banks like Kotak Bank and Yes Bank pay between 6% and 7% on such deposits. From the FY 2012-13, interest earned up to Rs 10,000 in a financial year on Saving Bank accounts is exempted from tax. 
_{Courtesy: http://www.allbankingsolutions.com/top-topics/dep1.shtml}

Definition of ‘Demand Deposit’
A demand deposit consists of funds held in an account from which deposited funds can be withdrawn at any time from the depository institution, such as a checking or savings account, accessible by a teller, ATM or online banking. In contrast, a term deposit is a type of account that cannot be accessed for a predetermined period of time. M1 is a category of the money supply that includes demand deposits as well as physical money and negotiable order of withdrawal (NOW) accounts that have no maturity period but limited withdrawals or transfers.
_{Read more: Demand Deposit Definition | Investopedia http://www.investopedia.com/terms/d/demanddeposit.asp#ixzz4TG8EBOqY  Follow us: Investopedia on Facebook}
A demand deposit is money that you deposit into a bank account from which you can withdraw 'on demand' - at any time without any advance notice to the bank. Common examples of accounts that are often demand deposit accounts include many checking and savings accounts. Keep in mind, however, that not all checking accounts and savings accounts are demand deposit accounts.
Manner of Demand: There are many ways you can make a demand on your bank for the funds deposited in a demand deposit account. You can make your demand upon the bank not only before a bank teller, but also through use of an ATM, use of a debit card, online banking transfers and through drawing a check. In fact, if you look closely at a check, you'll see the words 'pay to the order of' right before the line where you fill in the name of the person you're paying. You are actually demanding that the bank pay the sum of money indicated on the check to the payee identified on the check.
_{Courtesy: http://study.com/academy/lesson/demand-deposit-definition-lesson-quiz.html}

All of the above information is picked ‘as is’ from the links provided and these are not my words. So in Legal / Constitutional terms, Banks are free to put limits on any withdrawals from ‘Savings Accounts’ at any time, including cash transactions. In reality, there is limit placed only on Cash Withdrawals from ‘Savings Accounts’ (Teller and ATMs), while one is free to make any amount of transactions using all other instruments like Cheques, Debit Card swipe at POS, Online Payments (NEFT, RTGS, IMPS) or e-commerce transactions linked to the Savings Accounts. By all legal means, Banks do have the right to limit each of these types of transactions from ‘Savings Accounts’ as well.
Another right of the depositor would be to close the account. For this, the depositor can withdraw or transfer all the balance to another account. The Bank may also use the option of Bank Draft / Banker’s Cheque _{(Refer: http://www.investopedia.com/terms/b/bank_draft.asp)} in case there is no cash available in the concerned Bank for withdrawal. So the depositor’s money belongs to depositor at any time.

Having said all this, I agree that there are real problems in Indian Economy post Demonetization. There are few major issues like,

• IT and Telecom infrastructure – in order to use online modes of payments including different wallets, you need to have proper network (wired or wireless) enabled by adequate security, which is not there even in the biggest cities (supposed to Smart-cities) in the country
• Availability of POS machines and alternatives (M-swipe et al) – the merchants either do not want to use these devices or not able to get them
• Infrastructure Charges, Convenience Fees, Service Taxes on non-cash transactions (on non-Government sites) – if you want to make payments on any of the non-Government websites, you will see either of these being charged on top of your payable amount, which is not the case for cash transactions (Tax laws, implementations, official’s behaviour are few of the underlying issues)
• Availability of lower denomination currency – after (ideally before) demonetizing Rs. 500 and Rs. 1000, there should have been enough supply of lower denomination currency tenders to the Banks, so that the real needy people do not suffer

There are also few solutions / workarounds available that can be explored to overcome the problems. (What makes me qualified to put my opinions here? – I have been making more than 90% of all my transactions without using cash for last 10 years, at least. I needed to use the cash at all, because some places like vegies vendors, maids and daily perishables dealers are really not equipped / inclined to make cashless transactions)

• Financial Education to the common people on other instruments of transaction – Banks should really employ few retired people or students to educate the people standing in the queues of Banks and ATMs on how to make cashless transactions and what all alternatives are available. At least this education should reduce the amount of money these people would withdraw in cash (if not convince them to get out of that queue)

• Availability of other legal instruments and mandate as well as incentives to use them – Government, RBI and Banks should really be working on making POS machines and other devices available to the merchants, so that people do not need cash. And more importantly there should be proper infrastructure and legal backing present to make such cashless transactions mandatory, initially there should be incentives provided to all the people to go cashless (not just at Government sites and outlets, but everywhere)

 After all these, what remains is just the people who really want to evade the taxes and charges by remaining invisible to financial institutions aka Black Money hoarders.

Union Budget 2010-11

Finally this non-event has brought me to ad nauseam boredom & I decided not to follow it so rigorously anymore. Just one bit of good news for the working class is the new tax structure proposed

Income	Tax %
0-160000	0%
160001-500000	10%
500001-800000	20%
800001-above	30%

One angle to look at this is if you earned more, it’s more beneficial to you. Just look at table below. You tell me qui bono?

Income Rs.	Previous tax	New Tax	You save
350000	24000	19000	5000
500000	54000	34000	20000
750000	129000	104000	25000
1100000	234000	114000	120000

And this came at a time when the consumer is pissed off with the level on food item inflation. This is 4^th year I have been crying out loud that the government is playing plain dumb. We have so called “some of the best economists” sitting at the top viz. Manmohan Singh, P. Chidambaram, Montek Singh Ahaluwalia. And yet the government is not able to understand a simple problem for years, that we are not making any moves to tackle the supply side problems. That’s the main reason of the inflation. If you studied economics even for a year in your curriculum, you’d understand what I’m taking about. And these people have been in the field of economic for years & yet they do not seem to heed for this.

This whole façade is simply ridiculous & there seems no sense in making a hue & cry about it. So I better shut up & leave the country for the able leaders to ruin. I better spend my time in getting self-exiled like our dear old artist M. F. Hussain.

Union Budget 2009-10

Congress & UPA may have changed the Finance Minister but they haven’t changed the policy of the budget being a ‘non-event’ (a word personified by previous FM P Chidambaram) & the only concern the budget carries is ‘Inclusive Growth’ (Something the market has got fed up of since the Nehruvian Socialist India – the concept that still hasn’t quite worked; to UPA’s credit NREGA has got some favourable results including winning the election with clear mandate for Congress & UPA, without a pejorative external support of the Leftist, Communist parties). So in all, the budget had all the ingredients to make a rotten stew & that is what it made. Here’s the list of the ingredients & a small procedure of how to spoil the party.

The basic plan of this government is keep the wheels of growth spinning fast enough so that the wobble created by global financial turmoil does not derail the engine of growth. So the basic target is to maintain the GDP growth above 9% for the whole term, which includes maintaining the Agricultural growth above 4%. There has been lot of ruckus between the state & Central government regarding the collection & utilization of taxes since the introduction of VAT. So the FM has proposed the annual dialogue between the State Finance Ministers & the central government for resolving this issue & to ensure that the state government do no fall short of necessary funds.

Some significant points in expenditure for this year are as follows,

• The budget estimate for expenditure is set to cross the RS. 10 lakh crore for the first time. Total BE is Rs.10,21,000 crore out if which Rs.3,75,000 crore is planned expenditure.
• There is a proposal to set IIFCL as SPV for infrastructure growth.
• The Central Government to refinance 60% infra projects in critical infra sectors, amount estimated for the same is Rs.1,00,000 crore
• Funds allocated for JNNURM to be increased by 87% over last year.
• Also there is 23% increase in funds allocated for NHDP/NHAI.
• There is proposal of providing the farmers with loans up to Rs. 3,00,000 with special low interest of 7%. & further 1% reduction in interest rate to 6% for farmers who repay their loans on time.
• There is emphasis on irrigation with 75% increase in funds allocated.
• Micro, Small & Medium Enterprises are given a boost of 4000 crore for refinancing loans given by banks to these industries.
• A great positive as expected by market for the Petroleum Producing & Marketing industries is that the new mechanism to be introduced for Petroleum pricing policy which will try to decontrol the petroleum prices & put more in line with global crude prices to minimise losses of these industries & also it is bound to reduce the deficit burden on the government.
• To extend the Public involvement in the growth story of India Inc. there is proposal to expand Non promoter shareholding, as currently many of the listed companies have 10 – 15% general public (retail) holding only.
• An amount of Rs.39,100 crore for NREGA in this budget which is astounding 144% higher than last year due to the success witnessed in last year.
• Allocation for Bharat Nirman is up 45% from last year.
• Indira Awas Yojana is given 63% more funds than last year.
• Allocation of Rs.7000 crore for rural electrification.
• FM also proposed a plan of bringing the Employment exchange online to facilitate the jobseekers get into the right jobs & also to create a pool of talent for the India Inc. to choose from.
• There is boost for ex servicemen by increasing the Pension paid to them.
• The all centre of attention UID scheme which is now lead by Nandan Nilekani will be allotted Rs.120 crore & expected to be completed within 12 – 18 months.

Now something about the receipts

• The total Revenue Deficit for this year is set to be 4.8% of GDP.
• The Fiscal Deficit is revised to 6.8% of GDP but FM promised to bring it back within FRBM range at the earliest possible.
• The total Tax receipt for the year are budgeted to be Rs.6,42,000 crore
• Tax to GDP ratio is 11.5%.
• The only positive surprise in the budget that no one expected is that the GST is set to be introduced on previous target of April 1, 2010 without any delays.
• FM proposed to make the returns filing process simple yet again so the Saral 2 forms will be introduced soon.
• There will be New direct tax code prepared within 45 days
• Biggest negative that spooked market was that there was no change in Corporate tax. India Inc. was hoping for some reduction on that front.
• The individual tax exemption limits are changed to

• Senior citizen Rs.2,40,000
• Women Rs.1,90,000
• All others Rs.1,60,000

• Exemption under section 80DD Rs.100000
• Surcharge eliminated.
• Exemption under sections 10A 10B will be extended till FY09-10 end.
• One boost for the working class & a little to Corporates is the FBT is abolished as expected.
• Disappointment on individual level is the maximum deduction allowed under section 24(b) for the interest on borrowed capital for the purpose of purchase of home should have been increased to Rs.2,00,000 or even more sensible Rs.2,50,000, which was left unchanged to Rs.1,50,000.
• Another expected change is the STPI tax holidays are extended by 1 year.
• Tax holiday for exporters extended till FY10-11 end.
• All capital expenditure for the Corporates is allowed for deduction.
• Commodities Transaction Tax is abolished.
• MAT is raised to 15% from 10 %. This is supposed to cover up for the Surcharge & FBT abolition. In return to that the period to carry the loss for MAT is increased to 10 years from current 7 years.
• STT is tweaked to boost retail involvement.
• Exemption under section 80G will be 100% from current 50%.
• Exemption under 80E will be extended to all fields of education including vocational courses.
• Exemption under Section 80IB extended to natural gas
• Section 2(15) extended to organizations that work on improving environment.

Indirect taxes were left largely untouched. Few of the significant changes are as follows.

• Electronic sector customs duty benefits
• Set top box will attract duty of 5%.
• Duty on Wind mill magnets is cut to 5% from 7.5%.

I don’t need to say it differently than the overall market that this budget was disgusting & again a lost opportunity just to keep the promise of letting it be a ‘non-event’. I have been saying it for last 3 years now, since I started blogging this non-event that the Congress & UPA government have just not got the fundamentals of Economics right. This is astonishing & more disgusting because the best economist in the country is the PM. The reason I am saying it because for last 3 years there has been nearly no attention to the supply side of the economy, same is the case this year. All the efforts are targeted towards reviving & pushing the demand side up & thereby driving the growth. Should I remind you that similar thing was attempted by the great Alan Greenspan when he was heading Federal Bank & we all know where it ended. I fear we are just walking down the same path blindly & not ready to learn from the mistakes of predecessors. This is the same reason we witnessed the sky high inflation to the tune of 12.7% & my bet is it will be back again until the supply side is addressed on priority. The biggest thumb down was given to this budget because there was no roadmap for the all talked about & rather necessary reforms for the economy viz. disinvestment, financial reforms, view on FDI & FII. The uncertainty was maintained on it & market hates uncertainty. See where Nifty & Sensex are going, I need not say anything more.

Disgusted by Investment Bankers

I am finance professional with aspiration to become a significant investment banker in the global market. So with the same motive I do keep a close watch on capital markets & respected Investment Bankers of India & world. Rakesh Jhunjhunwala is considered to be Indian version of Warren Buffet & a highly respectable Investment Banker, or so I used to think before today.

The reason the title of the article reads the way it is is that I watched his interview on CNBC TV18 today. Refer this link to get a brief of what he said. I should make a disclosure before I say anything further, I Really used to adore him till today. But in this interview all he was doing is to show that he knows how to count & he knows the technical levels of Nifty. He uttered all possible numbers in the span of 10 minutes or so. Thank god he stopped short of saying that Nifty could see a level of 1500 or may be say 8000 this year.

He said one of the scenarios could be that Nifty hits 6100 or higher then comes back to 3300-3500 & consolidates for 3-4 years at that level. Again in another question to him, he said he is really sure about the GDP growth in India & we could see a double digit GDP growth number in coming years. So now can anyone tell me if he is so sure about economy, then how on earth the scenario he mentioned is possible? To hit double digit GDP growth numbers the Nifty constituents have to grow at least by 20% y-o-y, which justifies a P/E ratio for Nifty of about 20-22 at least. Nifty current earnings are about Rs. 210 for the FY08-09. There is no negative growth in earning of Nifty as a whole. So assume 5% growth on Nifty which is the most pessimistic figure I can come to as of now. This still gives earnings for Nifty of about Rs. 221 for FY09-10 & range for Nifty would be 4400-4800 going by the history. Remember this is my most pessimistic target! So how could you justify a double digit growth for GDP from now on & still reaching levels of 3300-3500 & consolidate there for 3-4 years. There is only one sane explanation for the prediction; India would need to go through one of the worst recessions since 1991. Then may the god help us!

The only conclusion I could reach after watching the interview is that either Rakesh Jhunjhunwala has no clue where the markets would be heading (which I think is highly unlikely) or he is just trying to fool the viewers in the bright sunshine. In both cases I sincerely feel he should not be appearing on TV & expressing his opinions. Because the all the Investment bankers on Wall Street have earned very bad name for themselves in the downfall of Investment Banking as we used to know, & he should not add to the bad reputation. This is really detrimental for the people like yours truly, who aspire to be an Investment Banker & I sincerely do no wish to stand in the line of a breed that becomes most despicable after the politicians of course. So my earnest requests to Rakesh Jhunjhunwala is either guide people to right direction or just say, “I have no clue where market is heading.” or “I would not like to tell you & lose my opportunity to make money from it.”

The end result is I have lost one of my most venerable deities to cheapest level of lying & obfuscating hapless investors who are already floundering in darkness.

Some capitalistic recollect!

Well, this recession has given me a lot of time, thanks to the great capitalist concept of lay-offs. So I’m getting some time to do my favourite thing, rumination! I am prone to pretty weird ideas and people close to me can corroborate that. I have been saying in my previous blogs that, it seems the ‘self proclaimed’ greatest capitalist nation - USA has been trying to solve all its capitalist follies by finding solution the communist way. Just look at AIG, Bank of America, and not to mention GM asking for more & more Federal bailouts. All these corporations have been greatest loss maker in the current financial downturn. Well to be precise, GM has been the laggard for a lot longer time, making spectacular losses for nearly a decade now. The very existence of the firm amazes me. Why have they not filed for bankruptcy at the start of this millennium & handed over the assets to a more efficient user like Toyota for crying out loud? What’s wrong in that, especially in the light of US not minding in financing the Federal budget deficit by selling their papers to more efficient (capital surplus) countries like Japan or China (more than $1.5 trillion combined)?

This brings me to my prime objective behind this article, if you really believe in Capitalism then why on earth you are relying on the Communist way to fix up the mess you created with your belief. Why not go back to ground zero & start looking for the clues to rebuild it. I am a firm Capitalist believer & I can’t even stand the idea of Communism. Just to strike an analogy, Capitalism relying in Communism for rescue out of the current financial mess is like Man relying on God to rescue him from the global warming situation. If you have got yourself into this deep trouble then you better think fast & stick to the basics. Well, I’m not just complaining about the situation, I actually have a probable solution in mind.

The fundamental of Capitalism is the Capital of the organization, the entrepreneur willing to take risk for the ideas he believe in. Putting his money & skills to the work to earn profits & name for him. He also can avail loans from financial organizations like Banks or VCs/PEs for funding the cause, but even they ask for the commitment from the entrepreneur in the form of initial investment. Now just look at the Feds from Capitalistic point of view, they are an organization, they have objective, they have budgets, but where is the capital (I mean Owned funds, not Capital Receipts)? In light of the latest budget proposed by Obama Government, which predicted a deficit to the tune of $1.75 trillion or 12.5% of GDP, isn’t this the most inefficient way of running the organization? Now my question is who made the rule that Government has to run only on debt? Why can’t Governments have owned funds? Why Governments can’t be run like non-profit organizations where they are accountable, even though they are not there to make profits but they have to break-even their operations in a consistent manner? Why the same does not apply to the Governments?

Many developing economies are run in the same manner, Deficit budgeting & Inflationary economy are their USPs. Given the situation of global financial systems, there needs a lot to be done to make good the losses made in foolhardy ventures taken over by umpteen organizations. If the Governments are bailing those organizations out, they can ask for capital in return to fund all the deficits they are bearing for the bail-outs. Otherwise this deficit can lead to another calamity in making; we could enter into galloping inflation worldwide, given the short supply of the resources. The point of contention is why the Governments have to be Communistic in design when the whole economy is strong Capitalistic in nature? Desperate times call for desperate measures, but then why not be desperate the Capitalistic way? I believe there are still many strong Capitalistic believers in US who could be willing to take the risk for their belief. So why not let the entrepreneurs do their bit for the revival of the economy? Why not look at the option of running the Government the Capitalistic way? Worth a shot?

One of my friends suggested me this link which corroborates my view.

Revival of global economy

There is no doubt about global turmoil on economic front but there are going to be umpteen opinions about how the global economy can be revived. The evidence is the huge strike called on by as many as 8 unions in France. This has almost stalled the whole country. As we go on from here this could be more than just an aberration.

To move the engines of growth moving as fast as they were a year back, there has to be free circulation of money in the global economy. So far whatever money was pumped into the global economy has been used to make good the losses made by bad assets of the Corporates like Merrill Lynch, Freddie Mac, and Fannie Mae of the world. So more money must be pumped in the global economy to lubricate the wheels of the engine of growth. There are basically two views about the possible quick recovery of the global economy. Let us have a look at them in brief.

One view is that of the governments world over & the actions that they are taking in a little haphazard manner. So far they have concentrated their efforts on rescuing the troubled corporations in their respective countries. So far they have spent as much as $2 trillion in this effort & almost $1 trillion is still in offering. So far the common people have been a mere observer in this preposterous sequence of events. The frequency with which the Corporates were nearing to bankruptcy & the immediate rescue packages declared by the governments to save the jobs in the country & in turn their skin has been astonishing. So should all the hard earned money of the people collected in the form of taxes be spent on revival of the sick companies? Obviously they have not been running their businesses in a correct manner. So isn’t it like rewarding the brats of classes by punishing the toppers. (This looks more like communist than capitalist to me, but hey, that’s just me! This time sponsored by the biggest capitalist, US of A!) This seems to be just an invitation to public outrage.

The second view to revival of the economy could be increasing the public consumption by putting the money directly in the hands of the people who can start spending that, it will flow in the hands of the Corporates who are doing the things right & whom the people trust. This can be done by two ways: by securing & creating jobs of the people working & by boosting the public infrastructure & thereby public spending. (This also is more or less like communism) (So the solution of capitalist follies in communism??? Shock for the American capitalism???)

Obviously in both the cases the banks have to play the role of lynchpin around which the money circulates. But for this the public confidence in the working banks needs to be restored. Both the views mentioned above cannot be executed in isolation but there has to be prioritisation of the actions taken. Should the money left with governments be spent on making good the losses first or should the infrastructure be given precedence over that? Because money also is a rare commodity & is not available in abundance & for free.

Then comes the time to ask who all are responsible for this huge farcical tragedy we got the privilege to witness. Prima facie the responsibility goes to the governments & the Corporates that benefited from the policies followed by the governments such as sub-prime lending & ridiculously low rates of interests for the housing loans & free availability of credit to any & every one. Add to that the lack of infrastructure & transparency in the rating agencies & auditors for the corporations. (Refer my previous blogs for details of this frivolity!) Now it’s time to restore some corporate governance, right after we achieve some government governance.

Unveiling the hoax

In the view of recent collapse of 4th biggest IT firm in India, namely Satyam. A great paradox! The word ‘Satyam’ means truth. It’s a tight slap in the face of the clamour that Indian IT industry was making about the highest standards they were maintaining in Corporate Governance. What is more painful is that this fraud on the statements & balance sheet was being carried forward for last 7 years, as per the disclosure given by B. Ramlinga Raju, the Promoter & Mentor of Satyam & in turn the IT revolution in India. The whole sequence has left the entire IT & Telecommunication industry shamefaced.
But there is something positive to take from this all. The investors the world over now understand that no one in the world is so sacrosanct to take their word blindly. The extent of this fraud is so horrific that no one knows the truth anymore. No one knows the value of assets & liabilities Satyam holds, the actual turnover it has or for that matter anything in the annual reports. As per the statement given by the caretaking head Mynepalli, they are not sure whether they have enough cash to pay the salary to the staff for Jan 2009.
In such a scenario no one would dare bailing Satyam out or even buy them out, even if it comes to a value of Re. 1 per share. This all was followed by unveiling few more scams in the making. Raju was about to siphon off $ 1.6 billion to his other flagship company Maytas Infra. Which luckily for the investors was discovered by media in time & Raju had to drop the idea. It followed by another event as World Bank banned Satyam for 8 years, because of data theft cases that came out in past few years.
Infosys has come out & publicly announced that they will not absorb any of the staff of Satyam, even on senior positions. They are partially right about it, as no one knows to what extent this scam goes. How can one hide a scam of an extent of Rs. 7000 crores i.e. $ 1.75 billion without having many of the staff accomplice in it. The only salvage for millions of investors is that Raju has been arrested & will be presented in the court. But the problem still is that India does not have its own version of Sarbanes Oxley Act which protects the investors’ interest. Indian counterpart of US SEC namely SEBI is a toothless tiger that only makes noise but can’t bite. This would give a big time wake up call to the bureaucrats & the lawmakers to come up with better mechanism than they have to avoid such instances in the future. At least this will get the economic reforms moving, that had been stalled since the existing government came into power and it’s been 5 years now!
The worst part of this fiasco is that it came in time when it was least needed. Whole world is crumpling under the pressure of recession & joblessness. This even has the potential to pull India into it, which so far was still hopeful of clocking growth of 6.5% in the current fiscal year. But the timing of this fiasco could not be just a coincidence; the scrutiny needs to check where all this started & how. My gut feeling is that, it all started with the dotcom burst in the Y2K. It makes a perfect sense that, Satyam should have collapsed in that burst, but thanks to innovation shown by Raju it not only survived but also was a symbol of strength. When other companies like Infosys, TCS lost their 40% of market cap in the IT slump of 2007, Satyam had lost barely 20% of its. The reason of the strength was impeccable forgery that none of the analysts could suspect.
Biggest question now for the investors is that what the auditors were doing when they signed the Auditor’s reports for all these years. This even has taken world’s trust away from the world’s big 4 accountancy & audit firms. As if the Arthur Anderson’s follies in Enron’s case weren’t enough, PriceWaterhouse Coopers wanted to test the wisdom of the people to discover another scam. Possibly we’ll now be left with only big 3 of these firms or may be we’re on the verge of all new accountability standards which brings some amount of trust back in the business. The stock market watchdogs world over need to come up with some better mechanism than current state of auditors & credit rating agencies. With the current sub-prime crisis & no. of scams that have come out in the recent times, we have all the reasons to question their business models & their integrity towards their profile.
Let us all hope that the outcome of this scam will bring some of the positives that the world has been waiting & longing for. It’s about time that we see the positives of globalisation, put our brains together to innovate the solution.

The looming recession

It’s been a long time since I blogged. My heartiest apologies to my loyal readers! The reason is quite apparent from the title I believe. According to most of the analysts & self proclaimed experts the recession is already here & it is here to stay for a considerable long time before it gives way to some growth. There had been many financial follies that our Harvard Princeton & IIM grads committed while creating a all gorging monster called derivatives that almost wiped out $3 trillion out of the world economy. This financial blunder is compared to the great depression of the 1930s. Could this be the apparition of the old & painful time that has come back from the underworld to haunt us for coming years?

Well let us first have a look at the reasons why we are facing this situation. The very base of this problem is faulty valuations of the assets held. It all started with the housing bubble in California. The root of this bubble lies with faulty policies brought forward by the No. 42 (read Bill Clinton – a ‘Democrat’ of course – republicans need not be happy for electing the worst ever president, the successor No. 43 ‘Dubya’) & his supporter the so called legendary Alan Greenspan – ex-Fed chief. They came together in a conspiracy of reducing the interest rates to such a historic low that anyone & everyone on the streets of US was capable for getting a housing loan. Obviously the demand for houses started increasing to an unreasonable level. People still kept buying such expensive houses & banks kept offering loans for buying such houses, both considering that they have backing of a very stable asset ‘The House.’
Now comes the time for the financial innovators. These loans offered by banks are converted into Mortgage backed CDOs (Collateralised Debt Obligations). They were securitised by the companies like Fannie Mae & Freddie Mac into resalable assets. These assets were bought by investment bankers like Lehman Bros & Merrill Lynch. Add to that another innovation called ‘Derivatives’, which itself has no value of its own but trades on some other asset like the paper money mentioned above. All of the institutions mentioned above are now liquidated. The correction of the prices started when general people realised that the houses they were buying or holding were not worth the prices they were quoting. So the base of all these financial innovation & great boost to global turnover was removed. The huge castles of cards built over such base had to come crashing down.

Other culprits to the disaster are the rating agencies world over, as all these assets were rated as ‘very safe’ before selling them to next buyer. So all the buyers were also under the misconception that their investments were also ‘very safe’. The valuation models followed by the rating agencies & the investment bankers need to be revisited to avoid any reoccurrence of such disaster in future.

In my opinion the even though the current crisis is very serious & the extent of losses booked are very huge; the biggest difference between the great depression & now is the role knowledge & information technology & media will play in resolving the problem. The biggest problem in recession has always been the public perception & sentiments. So far the media has been disgusting in helping the people out. When the prices were rising to a ridiculous level, they were not bothered to inform people about it. Now as the recession is round the corner, the only thing that can help prevent that is the public sentiment & spending that will boost the consumption in economy. If you read the articles in any of the financial periodicals, you’ll lose your appetite; forget about spending your hard earned money in the market.

In the end if anyone asks for my opinion about the whole situation, I’d say that there is problem in the global market & the recession is not here yet but it will be here. But if all knowledge works in the right direction then it won’t be here to stay for a longer time. I believe we have gathered enough knowledge & are equipped enough to come out of it. Particularly the BRIC nations will be the first ones to rise out of it. Now only the time will tell, how good an analyst I am!

Review - Union Budget 2008-09

This year’s budget was expected to be populist one as we are going into election before the next budget. And to certain extent the FM Mr. P. Chidambaram has lived up to it. The Highlights of the expenditure planning are as follows.

• National Rural Health Mission 15% increase in allocation

• Outlay of Rs. 16534cr for health care

• Initial allocation of NREGS Rs. 16000cr for all 596 rural districts; may be increased if necessary.

• Bharat Nirman allocation Rs. 31280cr

• LIC to cover woman SHG’s (Self Help Groups) linked to banks.

• Irrigation outlay Rs. 20000cr vs. Rs. 11000cr

• Waiver of debt schemes – for marginal & small farmers: complete waiver of loans – could be reimbursement to PSU banks – it would amount to 4% of all loans of banks: positive for PSU banks as some written of losses due to prudential norms will recover & NPA’s could be reduced by 0.5 – 1% – Amount of Rs. 60000cr total agri-loan waiver – needs to be done by June 08

• Addressing the demands of Anganwadi workers the basic pay to teaching staff increased from Rs. 1000 to Rs. 1500 & cleaning staff from Rs. 500 to Rs. 750

• 5 more UMPP bidding to be opened

• Exchange traded FOREX derivatives to be introduced

• Defence allocation Rs. 1.05 lakh cr up 10% from Rs. 96000cr

• Rs. 55000cr revenue deficit 1.4% vs. 1.5% previous year

• Fiscal deficit 3.1% vs. 3.3% previous year

Lot of emphasise is laid on expenditure to bring social justice just as was expected. But not much is being said about capital expenditure on infrastructure & to improve quality of education. 3 additional IIT’s & few IISc’s are planned but nothing about Management Schools.

The revenue side has been a boost as there was record collection on Direct as well as Indirect tax receipts. So little was done to tamper with the same.

Customs

• No change in peak rate

There was lot of hue & cry about possible custom duty & CVD cut to boost the supply side to reduce the cost push inflationary pressures but the budget has turned out to be total failure from that perspective. Same mistake is being repeated from last year. Also there was expectation that duty on crude would be reduced to cope up with fuel price pressure but that also did not come. So no relief for inflation from fiscal policy point of view. Monetary policy alone would not be enough to curb it, so it’s a failure on control of inflation parameter.

Excise

• Cut in excise for Buses, chassis, small car, 2/3 wheeler to 12% from 16%

• Cut in excise on Pharma products 8% from 16%

• Bulk Cement 400/ton

• CST 2% from 3%

Attempt is made to give a fillip to lagging auto industry. Also to cover the price limits put on pharma products. This move will surely achieve that.

Direct tax

• Slab changed till Rs. 1.50 lakh - nil, Rs. 1.5 – 3 lakh – 10%, Rs. 3 – 5 lakh – 20%, above Rs. 5 lakh – 30% & above 10 lakh add surcharge

• Women Rs. 1.8 lakh threshold

• Senior citizen Rs. 2.25 lakh threshold

• Corp rate surcharge unchanged

• Section 80D applicable for expense on policies of parent/s Rs. 15000

• Section 80IB – construction of Hospitals – 5 years haven, Construction of Hotels in Heritage sites recognised by UNESCO

• Short term capital gains tax increased to 15% from 10%

• Commodities transaction tax introduced

• DDT (Dividend Distribution Tax) 15% unchanged

• DDT waiver for subsidy passing profits to parent co. to avoid double taxation provided the parent is not subsidy to any other co.

• Bank transaction tax withdrawn

• STT (Securities Transaction Tax) unchanged

• STT on options premium only

Direct tax part lives up to populist budget. This would again put a demand pull inflationary pressure on economy as there will be more disposable income in the hands of individual which is boost to consumeristic tendency of the young generation.

There are many negative factors for the capital markets though. STT was expected to be reduced which was not. STT should have been removed from Options & Futures which not exactly materialized. DDT still not removed which still is sort of double taxation. There was expectation that the FM will try to boost the dull capital market condition but there was little he added to it. Few things are good as no DDT chargeable to earnings transferred from subsidy to parent company, with not enough clarity on additional clause. The banking transaction tax is removed, which was not fair in the first place; so correction of mistake. Scrap of TDS on debt instruments: this move is a boost to debt markets in the country.

In all, this budget could be termed as populist neutral budget which is precursor to elections. The FM is living up his wish to keep the budget as a non event. Wait for the year when you are not much concerned of this article.

Asphyxiating the hot economy!!!

First of all it has been a long time I’ve posted a blog, so might seem like a rusty touch, but the reason is just compelling enough to shrug off the rust & state what needs to be stated. The reason mentioned above is about the Indian economy & the Indian Capital Market; both of them are in such a booming stage that one cannot afford to miss it. That boom did not compel me to write on it but the recent peccadillo that the Finance Minister of India Mr. P. Chidambaram & our good old watchdog SEBI chief Mr. M. Damodaran created was the driving force for me.

Just a brief idea of that: there was an issue created out of nowhere that the Indian capital market was getting excessively high amount of dollar ($) flow that needs to be controlled. The solution for that so called fault was to make it compulsory for the FII (Foreign Institutional Investors) along with the Hedge Funds to register themselves with SEBI or get regulated from either India or the country of their origin; also to limit the Press Notes that were issued by these FIIs to the extent of 40% of their investments. Now the astonishing thing about this regulation is not the inexplicability of the clause but the reasons given by the persons responsible for it. The Finance Minister said that this was to control the flow of the capital that is flowing into Indian capital markets while at the same time the SEBI chief said that it was about disclosing the names & amount of anonymous investors into the market & to facilitate SEBI to keep a track of the money & it’s quality coming in. These two reasons are totally irrelevant to each other. The former one is about monetary policy of the country while the latter one speaks of mere the regulatory aspect of the capital markets.

If the former reason is held to be dominant then it is absolutely ridiculous one. The countries all over the world especially the emerging economies dream of such capital inflow into the system but our Finance Minister fears of it. While Chinese economy has been growing by more than average 10% p.a. for last decade our RBI (Reserve Bank of India) is afraid of the 9% growth we had for last 3 years & feel that our economy is overheating. The same tone seems to be voiced by the Finance Minister. If Chinese economy can do that & our economy can’t, then it just shows the incompetency of our monetary policy makers to manage things.

If the latter reason is taken to be true then first of all it seems to be too late for SEBI to check for the quality of the money coming in when the Sensex is already at the level of 19000. Also many analysts believe that there is no compliance problem with the FIIs & their issuance of P-Notes. Just they would need to get registered with SEBI which would not be too much of a problem. The real problem is with the Hedge Funds that are investing in India. The very fundamental of the working of the Hedge Funds is that they are totally independent of any regulations & perform under total freedom. The requirement asked by SEBI of the regulation of the fund will hurt them the most. Either they need to get regulated by SEBI or they need to pull out of Indian market. According to many analysts the amount each investor putting in would not be more than $10000 for each funds. Now is this unregulated amount too much for SEBI to handle? Then there is question of the competency level of SEBI officials also.

The fact is that the fundamentals of the Indian market are going to change with growth they are posting & with the prospects that are clearly visible. One of these fundamentals is the funds that are going to flow in & out of the market & Ministry of Finance & SEBI are just going to have to live with it & not make an attempt to fix things that don’t need fixing. Many analysts believe that all this fiasco is not going to reduce any flow of dollars coming in, instead they will only increase given the probable Fed rate cut in the offing on 30^th Oct 2007 & yours truly is one of them.

Review - Union Budget 2007-08

The much talked about union budget 07-08 for India was delivered yesterday 28-02-07. As expressed in the Indian Express this budget is just politically correct. Many execs believe that people will easily forget this budget within a few days, as there are very few changes in the overall condition for a common man. Due to many reasons including current levels of inflation, this budget was supposed to remove the fallacies in the economy including taxation reforms, viz. double taxation, removing futile exemptions. So on the front of public and corporate expectation this budget was a failure.

For your own referral here are some of the niceties of the budget, courtesy CNBC-TV-18 and moneycontrol.com.

Direct taxes: -

• Tax exemption limit extended by Rs. 10000/- reducing tax liability of an individual by Rs. 1000/- irrespective of age or sex. Pittance!
• Adding education cess of 1% on all sorts of tax liabilities, which will be spent on development of secondary education, making total cess 3%. Taking away the pittance, too!
• PAN will be compulsory and the sole identification number for capital market transactions. Lesser but compulsory complications!
• Tax exemption under section 80D is extended to Rs. 15000/- for normal individual and for senior citizen it’s Rs. 20000/-, little relief!
• Tax concessions under section 80IB for construction are scrapped which were beneficial for the buying of houses of area till 1000 sq. ft. in metros and 1500 sq. ft. in secondary cities. Unaffordable houses for middle class in cities.
• Cash transaction tax exemption raised from Rs. 25000/- a day to Rs. 50000/-. Still a pain… you know where!
• Investments in liquid/money market funds are taxed higher under Dividend Distribution Tax. Rose from 20% to 25%. DDT for companies’ declared dividend also rose from 12.5% to 15%. Absolutely uncalled for and baffling!
• ESOPs are now under FBT, rates fro which are not determined. Wasn’t FM supposed to clarify or even scrap FBT?
• The 10% surcharge has been removed for Corporates whose taxable income is less than Rs 1 crore. Expected to benefit SMEs!
• 11.22% MAT is now applicable to IT industry also. Wasn’t IT supposed to enjoy the tax holidays till 2009?

Indirect taxes: -

• Biggest story is the Excise duty on cement. For the companies that sell cement below Rs. 190/- a bag excise is reduced to Rs. 300/- from current Rs. 400/- a tonne, while for those that sell cement above Rs. 190/- a bag, it will be Rs. 600/- a tonne. Attempt is to bring cement prices below Rs. 190/- but unlikely to be taken by cement companies as welcome change!

Service Tax

• Service tax exemption for tech business incubators. Little relief!
• Drug testing clinical trials exempt from service tax. Big boost for research!
• Service tax on rental of property for commercial use. What’s the idea? Hitting business profit! Adding problem to already overblown real estate bubble!
• Service tax on works' contract service. Extending service tax net!

Excise

• Excise duty on pan masala without tobacco cut to 40%. Minor change!
• Excise duty on pan masala without tobacco cut to 40%. Minor change!
• Non-electric water filters fully exempt from excise. Save power!
• Umbrella, footwear excise duty cut to 8% vs. 16%. Get ready for monsoon!
• Bio diesel, food processing exempted from excise duty. Fuel alternatives and cheaper food products!
• SSI excise exemption raised to Rs. 15 mn vs. Rs. 10 mn. Benefit for Small Scale Industries!
• Excise on plywood cut to 8% from 16%. Supply support!
• Petrol, diesel ad valorem excise duty cut to 6% vs 8%. Expected and delivered!

Customs duty

• General customs duty on medical equipment 5%. Caring for health at last!
• Customs duty on animal feed cut to 20% vs. 30%. Be happy if you’re a dog or a cat! Can poor be fed with dog or cat food if the grains and pulses become more expensive?
• Customs duty on watch dials, umbrella cut to 5% vs. 12.5%. Care for time! Again Monsoon will hurt!
• Coking coal exempt from customs duty. Not a great solution for fuel alternative!
• Customs duty on cut, polished gems cut to 3% from 5%. Boost for Gems business!
• Customs duty on PFY cut to 7.5% from 10%. Little change!
• Crude, refined edible oils to be exempt from customs duty. Supply support!
• Customs duty on steel cut to 12% vs. 20%. The Tata effect!
• Customs duty on drip irrigation cut to 5% vs 7.5%. Caring for Agriculture! Supply support!
• Customs duty on polyester fibre yarn cut to 7.5% vs. 10%. Boost for textile industry!
• To cut peak rate for non-farm products to 10% vs. 12.5%. Supply support!

The explanation for such a budget would be that our FM stuck to his promise of making budget a non event. But at what point of time and at what cost? At this point economy is poised between high growth and high inflation. FM says that the inflation can be controlled with 3 points, viz. Money supply (this part is well taken care of by RBI with 4 increases in Repo rate and CRR each), Fiscal policy and Supply crunch. FM proposed few measures on fiscal side but they are all on mid term level, nothing to control inflation in short term! Agricultural sector is offered with many benefits to check on the supply side in course of 1/2 seasons, but it seems inflation would not have mattered after 1/2 seasons anyway. So nothing on offer for controlling the inflation!

On the other hand what seems is that in effect FM might add to the current level of inflation. Cement industry is in no mood of lowering the prices. Construction companies are out of tax haven, so the cost of construction goes up, in effect the prices of houses will increase by 15-20% in opinion of some builders. Interest rates for housing loans are already touching 13%. 4% short of pathetic socialistic rates of 17%. So it’s now impossible for middle class to buy a house. It was costing already Rs. 25 lakh for 500 sq. ft. now it will cost Rs. 30 lakh. Where the sense in the prices is and what calculations did the FM make to come up with these arrangements in budget.

There were many tax reforms expected to clear the regressive methods of double taxation like the DDT, which is over and after a company pays corporate tax. Instead what we get is increase in DDT. Thank god he didn’t decide to take the service tax to 15% i.e. to the level of global GST. He was supposed to bring down the duties to the level of SAFTA which did not happen at all. I believe that might have taken care of supply side in short term. He could have reduced the double taxes which should have been phased out after the introduction of VAT. He could have thrown light on Capital gains tax which still is a huge conundrum for many Corporates also. Thank god he did not tinker with STT. He just banned Wheat and Rice from MCX futures trading. That surely will come back once the inflation comes down. He should have shifted the tax slabs by at least Rs. 50000/- on higher side (optimistically Rs. 100000/-). That would have taken care of the pinch of the prices common man feels. He should have increased the tax rebate for housing loans under section 24 to Rs. 200000/- which went nowhere.

The FM has tried to be Robin Hood but in the end he has just become a marauder who’ll end up taking the money away from each and everyone. The budget is typical congress style which used to be from year 1947 to1991; it means lot of scope for MPs, MLAs and bureaucrats to launder money under many schemes announced by central government. It is all right for advanced polities to make budget a non event but for polity like India when poised at such a delicate manoeuvre which could make or break the backbone of our economy, to make the best opportunity into a non event is the most pathetic decisions ever taken by Mr. P. Chidambaram. This was 10^th time he was presenting budget and he too had an opportunity to go into Indian history like our respected PM did in 1991, but he decided otherwise.

There seriously is lapse in the performance of FM in this budget which could have simplified many things that were begging for it. On a scale of expectation FM’s attempt should be rated -3 on a scale of 0 to 10. I know this sounds as ridiculous as this budget itself!