Now that the election is done and dusted, all eyes are on the Budget and the reforms that the government needs to front load. The way a market is structured reveals a lot about the stage of development of the country. Indian regulations for markets and money have evolved piecemeal, solving problems as they came along. But the rules that worked when the economy was at $500 billion are already under stress as India rises to hit $3 trillion. The journey to $5 trillion and then double of that will need new rules of the game. Here are three areas that are crying for change.
One, as India moves from a financially repressed economy, the rules around forced investment into government bonds will need to change. Financial repression is when the government uses its dominant position to put in rules of the game such that it appropriates a bulk of the savings of the nation. It also means that the government, through the central bank, uses its power to set interest rates that are below the inflation rate. In the first case, household money finds its way to government bonds through banks and insurance firms. In the second, the government is able to inflate away its debt. Look at the rules for Indian banks and insurance companies and you see a text book case of financial repression. Banks are currently forced to keep 19% of their deposits in government securities as part of the statutory liquidity ratio (SLR) requirement and another 4% currently as the cash reserve ratio (CRR) requirement with the RBI. So of every ₹100 of deposits that a bank collects, it cannot put ₹23 to use (for lending). Insurance rules are similar. A bulk of the ₹32 trillion assets under management of Indian insurance firms buy government bonds. Notice how tough basic reforms have been in both banking and insurance in India, while stock market reform has been much easier. But this was the paradigm of a low-income, low-tax-paying and low-growth economy. A faster growth with more people paying taxes that result in a higher tax-GDP ratio will give the government the elbow room to relax these regressive rules that punish household savings. The Narendra Modi government should rethink these rules specially since an inflation-targeting central bank will keep inflation under the lid and the Fiscal Responsibility and Budget Management (FRBM) will keep deficits under control—the need for forced household savings will reduce. A rethink in investment rules in insurance, in particular, will open the door for change that stops the huge mis-selling that is in turn driven by high commissions. To read this piece click here
The election was called at 10:50 am by the external affairs minister Sushma Swaraj who congratulated Prime Minister Narendra Modi and thanked the electorate for this verdict. The votes were still being counted but the early morning trends were clear—this is a wave, a NaMo wave that is bigger than the 2014 wave. For an incumbent government to get this kind of a result tells its own story. That story is captured in the Sensex as it hit a lifetime high of 40,000 by 10:30 am. Bond prices liked the verdict and were up too. The two indicators of money were both exuberant as is the electorate that has demonstrated its maturity and ability to decode complex issues in Verdict 2019. I wrote at the beginning of Election 2019 that this is an India Rising-election that will change the old narrative of benevolent maai-baap handouts. Verdict 2019 gets me to add to this narrative—this election is a turning point in the electoral narrative of India that has for long played on caste, religion and election freebies.
Ahead of an event, we were gathered in the 25th floor office of the chairman, in the iconic Bombay Stock Exchange building. A building you enter after paying obeisance to the five foot high, eight foot long, one tonne raging bull stationed at the entrance to the building. A group of fund managers, mutual fund CEOs, intermediaries and I, the outsider from Delhi, are hanging around waiting for the event to begin. The talk, four days before the exit poll, was of course on the results. A straw poll around the room yields a base line 230 seats to the BJP and the possibility of a stand-alone majority government again. And what happens to the market? A 10% jump is not unexpected if the BJP gets a clear majority—markets like stability and continuity—say some of the fund managers present.
What’s so special about Panipat or Noida, or some parts of Punjab? For some it is home, for others these may be places they pass through, the same old crowded roads with slow moving haphazard traffic, the livestock on the roads. Still others may place them vaguely in north India. Others couldn’t care less. But there is something about these places, and several others across India, that is throwing up red flag after red flag. Take the case of Panipat. Some life insurance firms subject proposals for this (and many other identified cities and districts) with extra care when issuing policies. Say the word Indore and the capital market regulator sits up to notice investment advisor activity with greater scrutiny.
The next few generations may be able to dis-inherit the genetic bequeaths of diabetes or cancer or other ailments that parents have passed on to their offspring. Progress in genetics and medicine could make freedom from such bequeaths a matter of the ability to pay for the procedure and not the lack of availability of options. But while we wait for that not-so-dystopian future, there are a few other things that your children don’t want you to leave them. Having helped several friends and family deal with sudden exits of elder and not-so-old family heads, I get how harrowing dealing with the mess is. The time to grieve hardly gets over before the messiness of the lives of the departed come to shake you by the shoulder. These are the three things to avoid in your legacy.
Banks don’t mis-sell financial products in India. That is the conclusion we can draw from the annual report of the Banking Ombudsman (BO) for the year July 2017 to June 2018, where a tiny 0.4% of the total complaints made to the Ombudsman were related to mis-selling. This means that 654 banking customers in India complained that they were mis-sold by their bank. Overall too, very few Indians have a complaint about their banks—of the 700 million plus Indians with bank accounts, just 0.02% complained at all. Remove the inactive and dormant accounts, but still the percentage of people complaining at all is under 1%. But did you know that India was probably the only country where there were no complaints against mis-selling before 2017-18. The Banking Ombudsman only entertains complaints that it has defined in the categories or grounds of complaints; so if there is no category, there is no complaint. In an inter-regulator meeting in 2016, Reserve Bank of India (RBI) officials proudly said that banks did not mis-sell—see no complaints. If you don’t admit such complaints, it does not mean there are none. The attitude of not wanting to find the problem defines the RBI and the BO approach to consumer complaints in general and mis-selling in particular.