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| February 12, 2016 |
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Impact 
In a country like India that has immense cultural diversity and socio-economic inequality, running a government is not child’s play. Revenues of the central Government and state governments are constrained. The Government always finds itself in a catch-22 situation while allocating resources. It has to be fair to all, ensuring no injustice is done to one section of the economy for the betterment of the other. However, it can levy more responsibilities to one section to fuel the growth engine of the economy.
While the Government does this balancing act, it has to be watchful of not committing the obvious mistakes. Providing subsidy can be good, but what they provide subsidy for is crucial.
At a programme organised by Associated Chambers of Commerce of India (Assocham) in Delhi recently, Mr. Nitin Gadkari, Minister for Road Transport and Highways, briefed that the Government intends to launch a unique housing scheme for the poorer margins of society.
As he described, “Low cost housing is very important. The biggest impediment is that in our country there are only one per cent people who can buy houses above Rs 10 lakh. If we make available houses at a cost below Rs 5 lakh, 30 per cent people can buy that.”
More to the story
As a remedial measure to unaffordable cost of housing, the Government has been working on a pilot project to construct houses with fly ash and steel structure. The cost of construction is estimated to be around Rs 1,000 per sq. ft. The area of the house will be approximately 450 sq. ft., and the proposed cost of Rs 5 lakh will include the cost of solar system and furniture.
Government’s contribution
The Government intends to provide a subsidy of Rs 1.5 lakh per house and for the remaining Rs 3.5 lakh, a buyer can avail of a loan facility, which will also be at the subsidised interest rate of 7%-7.5%.
PersonalFN believes the Government intent behind launching this scheme may be worthwhile, but there are many hurdles that will have to be leveled before this scheme becomes a success story. Apart from this, the Government will have to do much more to provide shelter to the needy.
Let’s understand the possible flaws…
The construction cost may well be Rs 1,000 per sq. ft., however, it’s still unclear who will bear the cost of land? If it’s going to be paid by the Government (a current possibility), it needs to be seen how it will impact the Government’s balance sheet. Land deals are often the gateways to large scale corruption. To make matters worse, the Government has not been able to pass the Land Acquisition Bill in the Rajya Sabha.
Another pitfall could be the subsidised loans which will be made available at 7.0% to 7.5%. If the Public Sector Banks (PSBs) are going to provide the credit assistance, their credit quality (which is already very poor) may face severe pressure. Ironically, the Third Quarter numbers (FY 2015-16) of PSBs narrate the terrifying story of Indian banking system.
Lack of growth in corporate profits is likely to impact the direct tax collections this Financial Year (FY) 2015-16. The Government anticipated a collection of Rs 7.97 lakh crore this year—a jump of 26.5% over last year’s target. However, the growth in direct tax collections has been about 11.0% so far, as compared to the corresponding time last year. The Government is estimated to face a shortfall of around Rs 40,000 crore in direct tax collection.
Which brings up the obvious question, where will the money come from?
And let’s face this...
Smart cities, affordable housing, and all similar schemes might sound like remarkable schemes but if you look at the practical difficulties, apart from costs, you will realise it’s a slippery slope.
There’s no doubt every Indian should have their own home. There shouldn’t be any compromise on social equality and fair treatment to all citizens. But policies adopted to achieve these objectives must be sound and holistic in nature.
The Government first needs to address the real issue—price manipulations in the real estate across cities. You may read newspaper articles about the piling inventory of flats in top cities, but has anyone mentioned that buying property has become extremely affordable or prices have fallen 25% to 30%? Black money boosts the holding capacity of many developers who then (can afford to) overlook and disregard the economics of demand-supply keeping the prices more or less unchanged.
India has a massive urban-poor population. Implementation of affordable housing schemes in urban areas might be difficult, considering the high cost of land as well the difficulty in acquiring huge land banks, if the Government intends to.
The details of the new affordable housing scheme will be provided in a due course, but to achieve any success (without compromising fiscal prudence), the Government has to address many tough questions.
Is NDA= UPA II – Corruption?
At the onset, in May 2014 the Modi Government had promised minimum Government and Maximum Governance. One and half years later, citizens continue to wonder where the slogan is buried? Perhaps, under a heap of new promises.
Little irrelevant but worth having a look
At the time of writing this piece, equity markets are in the midst of some panic selling. Negative global factors can’t entirely be blamed for the bloodbath on the “Dalal Street”. It seems the markets are convinced that India’s prospects can’t make a turn for the better in the current state of affairs. The voters may be disappointed too. To woo voters, the Government can launch social schemes, (that plausibly address the real problems) making things more complicated in the long run. |
The Reserve Bank of India (RBI) has repeatedly expressed its concerns over the rising inflationary pressure in the housing sector, so, the Government’s reaction was well anticipated. What a prudent voter may have not expected from this Government was—the old rhetoric used in UPA II regime.
Populist measures coupled with a lack of reforms makes the present Government no better than the previous one for the economy. Absence of scams may be the only but a big positive though.
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Impact
The invention of fire has been one of the greatest discoveries in the history of the man. It paved the way for tremendous progress the human race has made so far. But imagine what the world would have looked like had man used the fire to only burn jungles and threaten other animals?
Every revolutionary development is a double edged sword. If used imprudently, what could have been a boon, can quickly turn into a nightmare. Something similar seems to be happening to the insurance sector in India.
Amendments to the Section 45 of the Insurance Act, 1938 in the Insurance Laws (Amendment) Act, 2015 have been revolutionary for the policyholders.
What changes amendments brought?
No policy of life insurance shall be called in question on any ground whatsoever after the expiry of three years from the date of the policy, i.e., from the date of issuance of the policy or the date of commencement of risk or the date of revival of the policy or the date of the rider to the policy, whichever is later. (2) A policy of life insurance may be called in question at any time within three years from the date of issuance of the policy or the date of commencement of risk or the date of revival of the policy or the date of the rider to the policy, whichever is later, on the ground of fraud: Provided that the insurer shall have to communicate in writing to the insured or the legal representatives or nominees or assignees of the insured the grounds and materials on which such decision is based.
It has been a pro-policyholders amendment, as it prohibited insurance companies from rejecting claims on life insurance policies in an unjust manner. But, it has started working against the industry now. So much so that there’s a clear-cut rise in fraudulent life insurance claims.
Taking the cognisance of the matter, the Insurance Regulatory and Development Authority (IRDA) has asked life insurance companies to further tighten their risk management processes and ensure frauds are detected at a much earlier stage. The regulator also believes better training would help curtail the instances of fraud in the life insurance segment.
PersonalFN is of the view that if the misuse of section 45 doesn’t decrease, the industry may approach the Central Government to seek resolution. This may give rise to a demand for revoking the provisions or making exceptions.
You as a policyholder can hardly do anything about it. But please make sure that you don’t fall prey to any promises your distributor makes. If you become aware that you can’t be offered insurance cover for any reason, refrain from taking any shortcuts or else it may cut short your expectations one day.
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Impact
Acrophobic people (those who have a fear of heights) are uncomfortable riding on a Ferris wheel. Their tour to an amusement park can sometimes turn into misery. It’s almost impossible for them to look down from the highest point. Sharp and skiddy rotations of the wheel make them feel nauseous. Fortunately, acrophobia is curable. Some experts believe that gradually exposing acrophobic people to heights may help alleviate their fear.
PersonalFN can’t help acrophobic patients effectively deal with panic situations but it can definitely help investors develop a coping mechanism to deal with market havocs.
Similarly, retail investors are also averse to sharp and skiddy movements but they are never afraid of heights. In fact, they always want to touch the sky; unfortunately it is almost always too high for them. And contrary to persons who suffer from acrophobia, they panic when markets are on their downward spiral.
Foreign Institutional Investors (FIIs) are the trend setters in Indian markets while domestic retail investors are followers. It’s observed that retail investors often keep distance from falling markets. They re-enter the game when there’s too much of a struggle for too little.
Losing Hope? 
Data as on January 31, 2016
(ACE MF, AMFI, PersonalFN Research)
In January 2016, the Indian bellwether index S&P BSE Sensex lost 4.9% as FIIs pulled out about Rs 11,100 crore from Indian markets. At Rs 2,128 crore in January, inflows in equity mutual funds were at their lowest since April 2014. Inflows in equity funds reflect the sentiment of retail investors. When investors are bearish, mutual funds receive lower inflows and vice-versa.
Since the onset of 2015, the memories of watershed victory of NDA Government were fresh. Returns generated by the markets in the immediate past were extremely impressive and encouraging. Riding the momentum, retail investors made a beeline for the Indian markets. But sooner, rather than later, the honeymoon period of the NDA Government ended. Expectations did not transform into reality. Corporate profits stayed stagnant and reforms got overshadowed by the intolerance debate.
To ready more about this story and PersonalFN’s views over it, please click here.
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Impact
“Ship of fools, all aboard the ship of fools
We blindly follow all the rules
On the ship of fools, all aboard the ship of fools
In the depths of the deep blue sea
Well, I better not catch you laughing at me
Ship of fools, all aboard the ship of fools
We blindly follow all the rules
On the ship of fools, all aboard the ship of fools
Well, I'd sail around the sea making sure
Everyone thinks like me”.
An allegorical song written by Robert Hunter and performed by the band Grateful Dead reminds us of Plato’s far-famed analogy of “ship of fools.” Plato believed when a ship of fools is on a voyage; a captain who knows the route and has good navigation skills is made jobless by fools who think he doesn’t know anything. Instead an incompetent first mate gets charge and the ship wanders deep seas.
...Fast forward to present day...
A ship of fools has been traced in Indian seas. However, what’s unclear is whether the fools aboard are mutual fund houses or mutual fund investors?
They (mutual fund houses) may have dozens of schemes under their product portfolio but their hunger for greater Assets under Management (AUM) is insatiable. What stops mutual fund houses from attracting money under existing and performing schemes? Only they know the answer.
But the matter of fact is their New Fund Offer (NFO) factory churns untiringly. This is why, when markets are up; they make believe markets will go further up and acquire money from investors through NFOs. The narrative quickly changes when the markets are down. For bearish phases, such as the one that currently prevails, the story is—markets have been corrected and now look attractive; so why not invest in NFOs that take advantage of existing market opportunities.
To ready more about this story and PersonalFN’s views over it, please click here.
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Do you invest in any of these; Public Provident Fund (PPF) Kisan Vikas Patra (KVP), National Savings Certificate (NSC), the Senior Citizens Savings Scheme and post office term deposits? If yes, be ready for the frequent changes in interest rates.
The Government has decided to lower rates on all Small Savings Schemes (SSS) barring those on Sukanya Samriddhi and Senior Citizen’s Scheme, with effect from April 01, 2016. Thereafter the rates will be adjusted every quarter
The RBI has been nudging banks to pass on the benefits of rate cuts to borrowers. The banks have frequently pinpointed the higher rates offered on SSS, which according to them keep their borrowing cost higher, making it difficult to cut borrowing rates. However, trade unions may not let the Government lower interest rates on Provident Fund (PF).
The RBI has been expecting the Government to decide on the SSS rates for some time now. With the proposed action, the Government seems to have honoured the expectations.
PersonalFN believes, this move may result in better monetary transition, however the Government will have to answer how the common man should prepare for retirement in the absence of any formidable social security system and ever rising food prices.
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Affordability Index: A measure of a population's ability to afford to purchase a particular item, such as a house, indexed to the population's income. An affordability index uses the value of 100 to represent the position of someone earning a population's median income, with values above 100 indicating that an item is less likely to be affordable and values below 100 indicating that an item is more affordable.
(Source: Investopedia)
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Quote : “More money has been lost trying to anticipate and protect from corrections than actually in them.”
Peter Lynch
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