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| January 13, 2017 |
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Impact 
Curbing black money was the primary objective of demonetisation. However, critics believe, the demonetisation has helped little to achieve its purpose and to hide this failure, the Government has diverted the focus to ‘digital transactions’.
Well, it might or might not be the case. But one thing is for sure—the Government looks determined about making India a less-cash economy.
As reported by the Economic Times dated January 13, 2017, the Government has been deliberating on imposing a tax on cash withdrawals above a certain limit.
The Special Investigation Team (SIT) has already made a suggestion that the Government should impose a per person limit of Rs 15 lakh on cash holdings. It also opined that a cap of Rs 3 lakh on cash transactions would also help in curing the black money circulation in the economy.
Various studies have highlighted the silent costs of allowing high cash transactions. RBI and commercial banks collectively shell out nearly Rs 21,000 p.a. on making money available to the system as and when needed.
Cash dealings happen largely for two reasons: to dodge tax, and to carry out illegal activities. To curb both these hazards, it’s crucial that the money should stay within the formal system.
Until the Budget comes out, it’s just a wait and watch game. If the Government imposes such tax, one problem may still persist. How will it track the money that has already gone out? It may never be deposited again in the banks. Tackling such problems would be the real test. The Government agencies are getting smart, but crooks are a step ahead.
Can Government outsmart them?
As they say, “where there is a will, there is a way. “
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Impact
We always hear good monsoon brings cheers to farmers. However, opposite seems to have happened this time. Good rains and bumper crop have made this harvest season a miserable one for the farmer. The recovery of proceeds also got delayed to demonetisation, adding to the woes of farmers.
Prices of maize, jowar, pulses and oilseeds crashed due to the glut of production. Fruits and vegetable prices have been under severe pressure. Food inflation (1.37%) touched the nadir in December 2016. As a result, retail inflation measured by the movement of Consumer Price Index (CIP) fell to a 2-year low of 3.41% in the last month of 2016. The previous low was 3.27% recorded in November 2014.
Inflation touches the rock-bottom
(Source: MOSPI, PersonalFN Research)
It’s noteworthy that, food price inflation for the month of November 2016 was revised downwards from 2.11% to 2.03%, reflecting a persisting pressure.
Given below are a few categories of the food articles that recorded either a fall or slower growth in prices.
- Vegetables: -14.59%
- Pulses: -1.57%
- Oil and Fats: 2.86%
- Fruits: 4.47%
On the other hand, sugar prices shot up 21.06%, and spices recorded an increase of 6.06%.
As far the core CPI is concerned i.e. inflation adjusted for fuel and food prices, the numbers look a lot healthier. The price-rise in a few important categories was as given below:
- Clothing and footwear: 4.88%
- Housing: 4.98%
- Miscellaneous items which include, health, education, transportation, recreation, and personal care: 4.73%
Inflation in the fuel and light category tipped at 3.77%.
In a nutshell, the overall inflation numbers appear satisfactory. From the viewpoint of the RBI monetary policy, anything below 5% would be a good number as the Central Bank aims to contain inflation under 5% by March 31, 2017.
For next 5 years, the inflation target has been 4.0%.
Meanwhile, for the month of November 2016, the growth in factory output measured by the movement of Index of Industrial Production (IIP) stood at a 4-year high of 5.7%. However, it primarily attributes to a lower base effect than an uptick in the industrial activity.
With two crucial economic indicators turning positive, the speculations of RBI reducing the policy rates by 25 bps (basis points) have gained ground. The RBI Governor, Dr Urjit Patel whom media widely perceived as an “inflation dove” initially has proved it wrong.
He recently said that “Low and stable inflation is an essential prerequisite to have a meaningful interest rate structure or regime where the decisions of savers and investors help to achieve maximal allocative efficiency in an economy whose investment rate has to increase for better growth outcomes.”
He was speaking at the Vibrant Gujarat Global Summit, in Gandhinagar. In a run-up to Union Budget 2017-18, he also directed the Government’s attention to the fiscal deficit level of states and centre combined together which is the highest among G-20 nations.
The sixth bi-monthly monetary policy review is scheduled on February 08, 2017. The Monetary Policy Committee (MPC) would keenly observe the provisions of Budget 2017-18, set to happen on February 01, 2017.
The Government has planned to double the farmer’s income by 2022. To be able to achieve that target, farmers need to get more for their produce. On the other hand, for growing rapidly, Indian economy cannot afford to run high inflation. It’s a catch 22 situation for the Government.
The Maharashtra Government has proposed to dissolve Agriculture Produce Marketing Committee (APMC). Such moves repeated even elsewhere, would help curb malpractices associated with the selling of agricultural produces. It’s a move that takes farmers closer to selling their own produce at a higher rate. Eliminating commission agents and other middlemen in the trade is mutually beneficial to farmers as well as consumers.
Can the RBI and Government jointly achieve the inflation target of 4% for next 5 years? Only the future will tell. Let’s keep track.
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Impact
If you have a dependable track record of loan repayment and an independent credit information bureaus rating that's high, you have something to cheer for.
Now, based on your credit score you can avail of cheaper home loans. Bank of Baroda (BOB), a state-run bank, recently announced that anyone with a Credit Information Bureau (India) Limited (CIBIL) score of 760 and above would be eligible for a home loan at 8.35%. This is the lowest offering so far, beating even SBI's 8.65%.
The Marginal Cost Lending Rate (MCLR) of BOB stands at 8.35%. In other words, the bank doesn't charge a premium to those with high credit scores. Without a doubt, mortgages provide additional safety but it seems post demonetisation, there is now a competition among banks to promote the credit growth.
There's a caveat though. Those who have a sub-724 credit score would get a rate of 9.35%. While those in the mid-range (725 to 759) will be charged 8.85% interest rate. Amongst the existing borrowers of BOB, clients who are still following the base rate mechanism may also be delighted. The bank has been offering a migration from the base rate system to MCLR system free of cost.
Let's see what affects your credit score...
Independent credit information agencies such as CIBIL collect information about your running loan repayments from a financial institution. And provides you with a score based on factors such as:
- Your timeliness of repayment;
- Usage of credit limits;
- Duration of credit;
- Types of loans—secured, unsecured, etc.; and
- The number of credit inquiries you made in the past
Can you improve your credit score?
Yes you can; to know how please click here.
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Impact
If you have been looking to diversify into non-equity assets through the mutual fund route, here's one more alternative that's going to be available soon. The Securities and Exchange Board of India (SEBI) has been pondering on allowing mutual fund houses to invest in Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs). The capital market regulator believes such investments by mutual funds can be classified as ‘alternative securities’. The SEBI board is likely to discuss this proposal during the board meeting scheduled on January 14, 2017, in Jaipur.
What will change for mutual funds?
If the proposal is accepted without any modification, then mutual fund houses can invest upto 10% of their total Assets Under Management (AUM) in a single project. And 5% will be a single project limit per scheme. Furthermore, no scheme can invest more than 10% of its assets in alternative securities.
Additional compliance for existing schemes
All existing schemes will have to ensure that, in case they plan to invest in alternative securities, there shouldn't be any change in the fundamental attributes of the scheme. As per SEBI, the fundamental attributes can be of 3 types...
- Scheme Type: Open-ended, close-ended, interval etc. The Schemes can be further classified into sectoral funds, equity funds, balanced funds, income funds, and index funds among others.
- Investment Objectives: Capital appreciation/income generation/both. Asset allocation is another important consideration.
- Termsof Issue: Liquidity and redemption provisions, expense structure, safety nets and guarantee provided, if any.
In other words, all existing schemes will have to ensure that there shouldn't be any change in any of the above attributes on account of it investing in alternative securities such as REITs and InvIts.
To read more about this story and Personal FN's views over it, please click here.
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According to a circular issued on January 4, 2017, the labour ministry has made it mandatory for all salaried people to submit their Aadhaar details for availing the benefits of subsidy under Employee’s Pension Scheme (EPS), 1995. The Government contributes 1.16% of employee’s salary upto Rs 6,500 thereby footing a bill of Rs 850 crore every year. Those who won’t provide the Government with such details won’t be entitled to get any such assistance until they comply.
But, making Aadhaar mandatory is completely unwarranted, especially when the Supreme Court (SC) has already warned the Government against making it compulsory for any service.
Let’s see what the SC noted earlier. “The Aadhaar card Scheme is purely voluntary and it cannot be made mandatory till the matter is finally decided by this Court one way or the other”.
Do we live in a land of fatwa rule? It might be a valid question.
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Base Effect: The consequence of abnormally high or low levels of inflation in a previous month distorting headline inflation numbers for the most recent month. A base effect can make it difficult to accurately assess inflation levels over time. It wears off over time if inflation levels are relatively constant.
(Source: Investopedia)
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Quote: "The best way to destroy the capitalist system is to debauch the currency. By a continuing process of inflation governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. "- John Maynard Keynes
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