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Monthly Archives: June 2019

Opinion | Triple A will mean ‘highest safety’ from next year

Posted on June 26, 2019 by monikahalan
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Debt funds have been under fire for the last few months for holding poor quality portfolios and doing gymnastics with investor money by entering into complicated bilateral arrangements with borrowers that got a higher return, but introduced very high risk to schemes that retail investors thought were safe. The story of encouraging retail investors to use debt funds instead of fixed deposits (FDs) went out of the window in the last 12 months. One part of the problem was not created by fund houses but by credit rating agencies that have been accused of being ‘flexible’ with their ratings and when pushed for accountability, have called them an ‘opinion’, especially when high rated debt paper imploded. The capital market regulator has oversight over these agencies and in a 13 June 2019 circular (you can read it here) has taken a big step forward in getting these agencies to be responsible for their ratings going forward.

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Posted in Expense Account, Let's Talk Money, Money Box, Money With Monika, Mutual Funds | Tagged bonds, Credit rating agencies, debt funds, downgrade, Sebi, Triple A | Leave a reply

Opinion | When a juggernaut changes direction, it does so slowly

Posted on June 19, 2019 by monikahalan
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The GDP (gross domestic product) number controversy is hugely important for all those looking at stock market-linked returns for their money. Retail investors who are today pouring in almost ₹1 trillion a year, or about ₹8,000 crore a month, in equity funds, are basing their investments on Indian growth. That this 7-8% growth could have been false is cause for concern to these households. What happened to make them worry is this: India’s former chief economic adviser (CEA) Arvind Subramanian gave legs to the idea that India’s growth numbers were overstated in his paper, titled India’s GDP Mis-estimation: Likelihood, Magnitudes,Mechanisms, and Implications.

He used a set of 17 indicators that are strongly correlated to GDP growth to estimate it and found a 2.5 percentage point overestimation per year for a six-year period ending 2017 (across UPA-2 and NDA-1). That a loud and vocal set of people is willing to simply take this number of 4.5% GDP growth on the basis of one academic paper, setting aside the entire statistical machinery of India whose only job is to do this math using well-established processes and systems, points to a hurry in grabbing any evidence they can find to suit an agenda. If somebody has already decided that this government is wrong no matter what, then they use any piece of data—real or imaginary—to support that belief. The government is putting out its response.

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Posted in Expense Account, Let's Talk Money, Money With Monika, Narendra Modi | Tagged Arvind Subramanian, black money, gold plating, graft, Modi 2.0, Narendara Modi, shell co, slowdown | Leave a reply

Opinion | Using the Singapore nudge in Indian tax law

Posted on June 12, 2019 by monikahalan
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Many years ago, on a vacation in Singapore, I was surprised to see the number of babies all over town. It looked like a baby boom in the city state. Cute, chubby babies everywhere. You can take the journalist out of the office on a holiday but you cannot take the office out of the journalist. So I dug deeper, asked people we knew, spoke to some locals and found that the government was worried about the falling population numbers and used taxes to solve this problem. The Parenthood Tax Rebate is a tax break given to tax residents to nudge them into making babies.

India’s new finance minister is crowdsourcing ideas for the budget and I want to suggest reworking the capital gains tax structure to nudge Indians into making the right choice in their asset allocation and product choices. The current tax matrix does not follow a first principle approach and is the result of annual tinkering with the rates and rules. There are two parts to this argument. First, the definition of what asset becomes “long-term” is crucial from a financial planning point of view. India has this definition backwards where we call a one-year holding period for equity as long-term, real estate goes long-term at two years and debt profits at three years. Unfortunately, tax policy has been made by people who sat on defined benefit pensions and had no personal understanding of market-linked financial products. They relied on theoretical models and academic versions of what households do. The result is the current mess. Financial planning 101 is that you use bonds and fixed income for either generating current income, for example, for the retired or for short- and medium-term money needs like a down payment of a home in two years or a college fee fund in the next three years. Long-term on this asset class should kick in after one year and not three.

Equity went “long-term” at year one, but this is an asset that is part of the long-term holding of a household and builds wealth. Long-term should kick in on, or after, the seventh year, given the data that a seven-year holding period for a broad market index in equity reduces the risk of volatility. There is a gradual slide down to a zero long-term capital gains status at the end of year seven. Tax equity profits as short-term till the seventh year. Have the rates slide down over the short-term tenure such that rates are high in year one and go down towards zero over the seven-year period. Real estate should go long-term from two years to at least 10 years, the current two-year holding period defies logic. Again use a sliding scale of short-term rates towards a lower long-term capital gains tax. If the policy direction is towards financialization, then tax long-term capital gains from real estate at 10% at the end of 10 years to give the equity culture a boost.

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Two, switches within an asset class need to have the same rules. Today the lack of logic in the free switches allowed within asset classes is driving money towards certain products. For example, profits from long-term capital gains in real estate can be invested in certain bonds to go tax-free. Or they can be invested into another property to go untaxed. There is no tax on switching in insurance products. But each time you punish a poorly performing equity fund manager to redeem and buy another better performing fund, or in a debt fund, you have to pay capital gains tax. Use a first principle approach to solve the problem of thinking about switches and then apply to the various asset classes, rather than perpetuate a flawed system.

Back-of-the-envelope calculations say that capital gains revenue is just 3% of the total income tax revenue that’s collected from individual taxpayers. The wonks in the ministry of finance should do some modelling to see what this new system will deliver and what this will do to the financialization of the economy. Just tinkering with tenure and rates will not give the deep foundation needed to take India to a tax-buoyant $5 trillion economy in the next five years.

Monika Halan is consulting editor at Mint and writes on household finance, policy and regulation

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Capital Gains TaxFinance MinisterBudget Ideas Crowdsourcing

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Posted in Expense Account, Financial Literacy, Investments, Let's Talk Money, Money With Monika, Mutual Funds, Personal Finance | Tagged asset class, bonds, Budget 2019-20, equity, long-term, mutual fund, Nirmala Sitharaman, nudge, real estate, short term, Tax | 1 Reply

Opinion | Will a woman finance minister know household finances better?

Posted on June 5, 2019 by monikahalan
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Friday morning, 31 May 2019, was ripe with promise for stock markets. Eight thousand steaming people had witnessed the new government being sworn in. People had braved traffic and human jams at the entry gate, multiple security checks and then the worst summer day that Delhi regularly throws at its people. A 40-degree humid evening turned the water bottles kept on every seat into a hot beverage. Friday morning messages and rumours pegged Amit Shah as the next finance minister (FM) taking the markets up sharply—the markets seemed to like the fact that Shah understood the stock market and owned just short of 250 stocks himself. But as names of different ministers were announced, the market threw a small temper tantrum when its expectations were not met. But we know that markets are manic depressive in the short term and soon enough rethink the tantrum as news gets digested. By Monday morning the markets were back to feeling happy with the world and India’s first full-time woman finance minister Nirmala Sitharaman. Indira Gandhi’s brief additional charge as FM in 1970-71 leading a $62 billion GDP does not compare with the challenge Sitharaman faces to take the almost $3 trillion economy to $5 trillion over her tenure.

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Posted in Expense Account, Financial Literacy, Let's Talk Money, Mint, Money, Money Box, Money With Monika, Mutual Funds | Tagged demand side, FM, Household finance, Nirmala Sitharaman, supply side, woman | Leave a reply

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