It is not often that an Economist and a government one at that is able to bring energy and passion in a speech. But India’s Chief Economic Advisor K V Subramanian managed the impossible when he presented the highlights of Economic Survey 2020-21 on 29 January 2021. Using stories to put across complex economic concepts, the desire to reach out to the non-economists of the country was obvious.
There were two narratives in the presentation. One looked back. The other looked ahead. Subramanian used the example of India’s covid response to make the point that India was an outlier in its covid strategy both with a hard lock-down and with muted fiscal spend at the front of the pandemic. 10 months later, India is emerging with a low case load and a low death rate as compared to the developed countries. India is also seeing a V-shaped recovery as the financial year is winding down and the de-growth number has fallen further to about 7.5%.
What I heard the CEA not say but imply is this: India has its own story; its own stage of development and it cannot cut paste the solution set used by countries with very different demographics and per capital incomes. What a country with $40,000 per capita income with a tax to GDP ratio of 30% to 50% can do is very different from what India, with a per capita income of $ 2,000 with a tax to GDP ratio of about 11% can do. He said that there is no point in pressing the accelerator when the brakes are down to justify back-ending the fiscal spend.
Using this as a back drop, he then argues for similar bold India-specific policy solutions on the road ahead. He argued for a big fiscal push to go for growth. Let’s not worry too much about inequality at the moment, because growth will lift all boats. Dealing with the issue of inequality, his prescription is to grow the pie rather than try and cut the same pie into smaller pieces. There is need for the government to push fiscal spends till the private sector investments begin again. This spend is needed till GDP growth recovers to the pre-covid trend line. After that the government should gradually withdraw the spend and let the virtuous cycle of private sector investments take over.
He also made a case to ignore the global credit ratings. His advice is to ignore the noise that the credit ratings will make when the Indian fiscal deficit bloats to higher levels. Data shows a racial bias against India and China in credit ratings over time and India has never defaulted on its debt payments – we even shipped gold as collateral in 1991. The stock, bond and currency markets ignore these ratings, he says, so should we.
All this points to a big fiscal push in Budget 2021 to target aggressive growth.
Monika writes on household finance, policy and regulation.
When thousands of tractors run amok over the roads of Delhi, battering public goods and public servants because the demand of a section of ‘farmers’ for repeal of farm laws is not met, it is a good time to ask some questions. Who are these people and how is it that they drive in SUVs, ride tractors and seem to have a lavish lifestyle, pay no income taxes, yet want subsidies and state guarantees to continue?
In fact, it is a good time, just ahead of Budget 2021, to ask, why just 1.5 crore people out of 130 crore Indians pay income tax? And why is it that the small fraction of people under the tax net continues to be pressed harder and harder each budget with cesses and surcharges that add to the tax burden. There are between nine and 11 tax categories (depending whether you choose the old tax system where you claim deductions or the new tax system introduced in Budget 2020) with the highest surcharge reaching 37% for incomes beyond Rs 5 crore, giving India a very high marginal income tax rate of 42.7%. With the personal income tax to GDP ratio a tiny 2.5% (France does 9.5% and Germany 10.4%), India’s state capacity to fund infrastructure, health and education is seriously impaired.
Budget 2021 is being seen as the bounce back budget that will trigger growth. I want Budget 2021 to do three specific things, in addition to finding that magic path between fiscal prudence and growth.
One, bring tax democracy – find ways to get those who have escaped paying taxes for decades into the tax net. Income from agriculture is given a free pass, but this provision has been used to launder non-agriculture income and has allowed rich farmers to get away without paying their share. Although it is a state subject, some way to tax this income must be found.
The other cohort that evades taxes are the self-employed who report far lower incomes than their lifestyle or assets support. The government has been toying with the idea of pre-filled tax forms where it collates the big data of spending and assets and puts down the tax due from the PAN holder. This will not only reduce costs of compliance but also put the onus on the tax payer to deny that the spends and the assets are indeed hers.
Two, India needs a consumption spending push to deepen the profit-led growth so far, but we simply do not have the fiscal room to do the kind of doles seen in the US, UK and mainland Europe. A possible way out could be to allow those earning above Rs 15,000 a month an option to not contribute their part of the Employees Provident Fund (EPF) money for a year. The law makes a 12% contribution mandatory only to people earning upto Rs 15,000 a month of income, however in most offices make it a mandatory cut. The government can advise firms to offer this option to eligible employees. However, the employer’s contribution continues. The government can decide if it is a retrospective return of money collected for FY 21 or a prospective benefit for FY 22. This puts money directly in the hands of the category of people not that badly hit by Covid to spend.
And three, the government needs to spend on building infrastructure, but again there is limited fiscal space. The disinvestment road is already there, and I am hoping that there is movement on both Air India and the LIC stock sale, but there is another route to get long-term funds for infra projects. This is to use the Indian household’s love for government guarantees to offer them a deep discount bond. This is a zero-coupon bond that does not give periodic interest, but the investor gets a defined amount back after a number of years. Make it tax free – exempt, exempt, exempt – and lock-in the money for 15 or 20 years. Household money is very sticky, other than HNI investors, most retail investors stay invested for years and they like certainty of the future value and date of maturity of their investment. The government should use this investor preference for government guarantees to find a way to directly sell the bond to them.
India needs innovative solutions to the age-old problems of too few people pulling the income tax burden and pockets of beneficiaries cornering the government spends.
Monika writes on household finance, policy and regulation.
It’s happened. The Sensex has hit the big milestone of 50,000 points today, 21 January 2021. The Indian stock market, filled with money of global and domestic investors is celebrating the reviving economy, the vaccine roll-out and the big-bang budget signals coming from North Block. It can be said, the market is celebrating the re-rating of India in the minds of the world.
While I celebrate this milestone, I must tell you the stories of earlier milestones and how they were irrelevant as signals to investors to either enter or exit the stock market. My first job, in a business magazine, in Autumn of 1991 coincided with the Indian economic reforms and a big bull run on the Indian stock market. Markets doubled over the year and then doubled again in the next six months hitting almost 5,000 in April 1992. I remember hearing as a cub reporter: “how high will it go? This is a scam!” And it was. This unreal quadrupling of the market over under two years was based on loopholes in the Indian banking system that were used by operators to inflate stock prices. The subsequent crash lasted the full decade, all the way to the new millinium.
The 1990s saw the economic reforms settle down into some real on-ground economic changes. They also saw the birth of a new regulatory system for the Indian stock markets. The crisis was used to bring transparency, order and rules of the game to the wild west that used to be the Indian stock market. The creation of the National Stock Exchange that used screen-based trading instead of the open outcry system and the setting up of Sebi as the market regulator, depositories, settlement guarantees funds and a big infra upgrade gave the Indian markets a very strong foundation.
It took till September 2005 for the markets to double again, when they hit the 8,000 mark. Then another five months to breach the psychologically significant 10,000 point. I remember the party hats, the balloons and the cakes in TV studios as the Sensex party pointed to reflected a strong economy and growth ahead. I remember the wife of a stock market investor asking me wide-eyed – how high will this market go? I hear it will go to, gasp, 12,000! I remember telling her – your husband needs to diversify his risk – at 60 he is over-invested in direct stocks. At 12,000 investors thought they had missed the bus. That the markets were “too high”.
It took just another year and two months to zoom past 12k to rest at 15,000. And then six months later to fly to 20,000 in December 2007. This was just before the North Atlantic Financial Crisis of 2008. This was the era of the Greenspan put – the easy money unleashed on the world by the Ayn Rand acolyte who himself later admitted to holding policy rates too low for too long. I remember reading full page articles over 2007 and halfway to 2008 in respected US and UK newspapers as they told us that money managers had taken risk and “ground it into tiny particles”. They said the world was risk-free. They said, this time it is different. And of course, it was not. As the world discovered garbage in the triple A rated bonds made of securitized retail loans, the contagion threatened to grind the wheels of the global economy to a standstill.
FD investors finally tired of their risk-averseness, threw caution to the winds and rushed headlong to the market to get rich quick. But they saw their wealth shave off more than half its value over the next year as the index went into a free-fall to touch 9,800 in October 2008. Retail investors historically bought when the market had nothing but steam and kept holding the collapsed balloon, hoping for a reflation and getting back to the buying prices of the dud stocks they owned.
But as the market digested the news that India had largely been isolated from the toxic products, other than a few high-profile private banks, markets took two years to recover to the 20,000 mark in January 2013.
At 20,000, the question I was asked was again the same: “how high will this market go? I am too late to invest. This train has left the station”. It took another year and a half for markets to touch 25,000 as the Narendra Modi government took over the reins from a deeply corrupt and stagnant UPA II. The next milestone waited for NDA II, and that is when the Sensex hit 40,000 in mid 2019. Then came the Covid lock-down in March 2020 making the market slump all the way down to just over 26,000 – a heart-stopping drop over a week. The stock market nay-sayers got active again and told stories of how they have been right all along and the Indian stock market is a scam. How gold is the only safe spot. How people have got ruined by advice of people like me – who advocate an asset allocation route to building a mutual fund portfolio that has both equities and bonds. But the Indian retail investors had mostly learnt their lessons from the past crashes and used the opportunity to buy more. The market took just seven months to recover to the 40k mark. And two months later in December 2020 hit 45,000.
As we stand at 50,000 Sensex, the only learning is this: celebrate the milestones, but then ignore the Sensex when you invest. Investors along the ride that I have myself taken, from Sensex 1,800 to Sensex 50,000 over a 30-year period, have said the same thing: “how high will it go and I am too late to invest”. What they failed to understand that the Sensex is just reflecting the underlying growth of the Indian economy. It may crash from 50,000 in the next few months. But if you have used the rising markets to rebalance your portfolio – you are doing just fine. For those on the sidelines – please don’t rush in with all your money when markets are breaching an all-time high. Make a plan. Invest according to that. Then forget Sensex values.
Monika writes on household finance, policy and regulation.
In March 2020 we understood risk a little better in both equity and debt mutual funds. Better returns have been one of the reasons that investors released the safety belt of the fixed deposit to ride market-linked returns in both equity and debt. But higher returns and liquidity come with a greater risk. Investors need to be able to evaluate risk better before they fully let go of the low post-tax return FDs or traditional bundled life insurance policies.
There are two ways to take risk into consideration when investing – one through a fee-only financial planner who does the risk analysis for you and chooses the products to build a portfolio that suits your ability to handle the risk. The other way is for you to evaluate the risk and return parameters and build your own portfolio.
Having an easy way to understand risk became reality on 1 January, 2021 when Sebi’s new rules on marking and updating risk in mutual funds became live through a new version of the old risk-o-meter. This risk-o-meter is an upgrade over the previous one in three ways.
One, there are now six categories of risk instead of five. Risk metrics go from low to very high. The last one is a new category to indicate schemes where investors money is exposed to what is extreme risk for a retail investor.
Two, the way that risk itself is calculated now has a proper methodology. Debt funds will be judged on three metrics of liquidity, credit risk and interest rate risk. You can watch this video to understand these risks better. Or read this. And this.The final score will be a mix of the risk of these three attributes.
Equity risk will be mapped on volatility, market cap and impact cost. For example, the risk of a sharp fall in value is higher for a small cap stock than a large cap stock. The new risk-o-meter will take the holdings of such stocks in the portfolio into account.
Three, the risk score will be disclosed by the 10th of each month on the individual fund and AMFI website. Then every year on 31 March, the fund will disclose how many times the risk metric changed over the year. If you find your fund’s risk rating changing often, it will be a red flag to see why this is happening.
I’ll tell you how I will use the risk-o-meter. I want my debt funds to be fully safe – that’s why I moved out of FDs to debt – for higher returns, flexibility along with low risk. I do not want to expose my debt funds to needless risk and will choose the very low and low risk funds only. The risk-o-meter will mark risk clearly in debt funds that take very high risk on buying lower quality bonds or those that have a large liquidity risk (these two are related since bond markets for non-triple A bonds are not very deep in India).
In equity, the risk metrics will be mostly high and very high for most schemes and I will need to do further work to see that the portfolio has slices of large, mid and small cap and foreign funds. I will look at the overall portfolio risk that I carry to see if this is in tune with how I see my own ability to suffer a capital loss.
Just looking at the risk-o-meter will not be enough to judge whether or not you should invest in a scheme, but gives you one more tool to evaluate risk. If you work with a planner, ask her to indicate the portfolio risk basis the risk-o-meter to understand whether the overall portfolio risk metric is in line with what you think it should be.
Sebi has been the most proactive regulator in making disclosures meaningful for investors. Do engage with the risk-o-meter to understand your own schemes and portfolio. The markets are on an happy upward sprint today, but always remember that March 2020 week when your equity lost 30% of its value and six debt funds got frozen. That is the risk that you need to remember when you are investing in a bull market.
Monika Halan writes on household finance, policy and regulation. She tweets at @monikahalan.
Prime Minister Narendra Modi interacted with leading economists of the country on charting the economic agenda in the post-COVID world and highlighted government’s commitment to developing world-class infrastructure and the economic potential set to be unleashed by National Optical Fibre Network.
He highlighted the faith shown by foreign investors in India’s growth story, with foreign direct investment growing by 11 per cent between April and October, despite a global recession.
The participants stressed the importance of investing in public health and education, as human capital would also likely emerge as a driver of growth, especially in the knowledge economy going forward. They also stressed on labour-intensive manufacturing given the success India has achieved in launching the PLI scheme in mobile manufacturing. The interaction was organised by Niti Aayog.
“Government expenditure on infrastructure was a point made by many participants as a driver of growth in the coming years, given the significant multiplier benefits that accrue to the economy from public investments in infrastructure. A focus on labour-intensive manufacturing was also mooted by participants, given the success India has achieved in launching the production linked incentives (PLI) scheme in mobile manufacturing,” a release by NITI Aayog said.
It said the participants agreed that high-frequency indicators were showing signs of a strong economic recovery and that too earlier than expected.
They were broadly in agreement that next year will see robust growth and suggested measures to maintain this growth rate to drive India’s socio-economic transformation.”
“The participants highlighted the strong structural reform measures that have been undertaken in the past few years and how they would help in the creation of an Atmanirbhar Bharat. Suggestions were made by participants on future reform areas,” the release said.
The Prime Minister explained his vision behind an Atmanirbhar Bharat, where Indian companies are integrated in global supply chains in a manner not seen before.
“PM Modi further highlighted the economic potential set to be unleashed by the National Optical Fibre Network, providing internet connectivity to some of India’s most remote areas. On infrastructure, the Prime Minister highlighted the National Infrastructure Pipeline as the government’s commitment to developing world-class infrastructure. The Prime Minister ended his talk by stating the importance of partnerships in achieving our goals, and that such consultations play a crucial role in setting the broader economic agenda,” the release.
Finance Minister Nirmala Sitharaman attended the meeting.
The leading economists who participated in the discussion included Arvind Panagariya, Arvind Virmani, Abhay Pethe, Ashok Lahiri, Abheek Barua, Ila Patnaik, KV Kamath, Monika Halan, Rajiv Mantri, Rakesh Mohan, Ravindra Dholakia, Saumya Kanti Ghosh, Shankar Acharya, Shekhar Shah, Sonal Varma and Sunil Jain. (ANI)
The year 2020 was one of fear for our health, jobs and net worth. A small section of the Indian investors – those with the right exposure to equity and with a good blend of bonds and stocks – did well. The rest just looked on from the sidelines and wished they had the mindset to step away from the purchasing-power-depleting fixed deposits and other fixed-return financial products towards equity. Minus another global pandemic or something similar that we cannot blend into our predictions for the year, 2021 is being seen as the year that we recover our lives. But along with this recovery comes big change. We are told that the world has changed forever. That the dollar will lose its crown. That gold and Bitcoin will rule. That the stock market will collapse. It is frightening to hear these doomsday predictions and continue to think about our own financial futures with any confidence. As you hear these aggressive predictions, just do a quick search online to see that almost every year there has been a new reason for the financial world to end. The pandemic is just a larger and all-pervasive global event, but this too will pass.
Along with the Covid vaccine, you need to vaccinate yourself against reacting with fear or greed. While my money advice remains the old boring stuff of asset allocation, diversification and making your investing a matter of habit rather than a one-time decision, we must not bury our heads in the sand and look around for new information as it comes. 2021 will mean different things for different parts of our asset pie.
Fixed income. When central banks ease money supply by lowering the benchmark rate (the rate at which they lend to banks) or when they print money (as some of the hard currency countries are doing), there are fears of inflation and asset bubbles. Inflation is the result of too much money in the system that drives up prices – our rupee buys less and less. With low policy rates reflecting in a saving deposit rate of as low as 2.75% and FD rates of less than 6%. With inflation beginning to gather buoyancy, the post-tax return of the fixed-return investor will be negative. For the fully risk-averse investor in 2021, blending in some gold will be a good idea to build in some hedge against inflation. But do it only through the government sovereign gold bonds. Also remember, investing in corporate bonds that give a few percentage points higher return than bank FDs is actually far risker than having an equity exposure. Also, as an FD investor if you are thinking of unregulated investments including crypto currencies, you should really worry about your financial future.
Equity. Related to the easy money story are asset bubbles. Asset bubbles get formed when there is almost free money being given away by banks and these bubbles form across stock markets, real estate, alternate investments, art, wine – whatever the really wealthy funnel money into as they borrow at almost nothing and look for a quick short-term return. This makes for global headlines about rising and falling values of different asset classes making the average retail investor greedy or fearful. Equity investors in 2021 have just been through the rapids of 2020 and should be geared up for volatility. Having a good mix of broad market index, mid and small cap funds is your best path to getting an equity exposure to your long-term money. Find good funds and then stay with them till the data changes. Steady investors have done much better in 2020 than people who have tried to move in and out of the market. 2021 will be no different.
Real estate. For a decade the developers and brokers have been saying that this will be the year that real estate will revive hoping to draw investors in. But a mix of outright frauds, builder gouging and pure builder greed has taken investor interest out of real estate. An overall tightening of the system against black money too has worked to take the froth off. Real estate even today is a very long-term deal, the flip-and-double-in-a-year days are gone. Invest only if you see yields of at least 4% (annual rent divided by capital value of the property) and that too with cash down and not on a loan. Remember that Indian lending rates are nowhere near zero.
Gold. In times of global distress this metal does very well and so it has over 2020. Keep your exposure to gold between 5% and 10% of your net worth. Use the sovereign gold bonds to invest – you get an annual taxable interest (gold in other forms does not throw off rent, dividend or interest) and at maturity you get a free pass on the capital gains tax on these bonds.
Bitcoin. The case for bitcoin and other crypto currencies is being made keeping in mind the devaluation of the dollar due to the huge flood of money that the Fed has been releasing over the years. The search for a store of value and a hedge against potential inflation is for real – fixed return investors need to think about this. But the answer for such risk-averse investors is surely not an unregulated ‘asset’. Doomsday prophets like to think of a world where they are the wealthy owners of Bitcoin where the rest of the world currencies are fully debased. Such doomsday schemes only work out in movies. This is not to say that none of the Bitcoin investors will make money, but for pure retail investors who hesitate to step even into index funds, this is not where you put your money.
Each year will throw up a new winning asset class. By chasing last year’s winners, don’t wager your financial security. The era of uncertainty is here – steady money is your vaccine.
Monika writes on household finance, policy and regulation.
Monika Halan's blog 
