The PNB fraud has left many of us feeling cheated although no money has gone out of our pockets directly. We feel cheated because the rich and the well-connected once again appear to have managed to get away after stealing a large amount of money. The pictures of smug high lifers seem to be mocking those who play by the rules.
We feel cheated because we are made to feel like criminals when we intersect with the financial sector—each of us, every few years, has to redo our KYC details. The linking of Aadhaar to various services has now reached a level where a corporate chemist chain is sending texts to customers to link Aadhaar to the account. When we seek a loan, the due diligence process is exhausting; the contracts are not really two people agreeing, it is the weaker party (us) just signing what the stronger party (bank) shoves across the table. Miss one EMI or get behind your credit card payment and the hounding begins relentlessly. A friend’s sister is a senior bank manager in a state-run bank in a small town in middle India. A part of her territory is also the nearby rural clusters and some of her work is loan recovery. As details of the Nirav Modi theft emerged, her sense of disbelief grew. She said that when sometimes people defaulted on loans, she has actually threatened to walk off with a cow or a goat as collateral to make good the bank’s loss. For the poor people, who will surely be even less able to pay their debt with their asset gone, the loss would be mind numbing. But the rich get away with it because of political patronage, collusion and greed. Fraud of this kind corrodes the overall value system of a nation when people feel justified in cheating and not paying taxes.
If the Union Budget looks ahead at the year and makes forecasts on how the government will gather revenue and spend it, the Economic Survey looks back to take stock of what happened and then lays out the big-picture goals, challenges and scenarios for the Indian economy. It is more of a vision statement than a to-do list. Just as the Budget document has the signature flavour of the finance minister, the Survey carries the DNA print of the chief economic advisor. The key message of Arvind Subramanian’s Economic Survey for 2017-18 can be summed up in one phrase: revival and risk, and he shows this in one chart on the behaviour of bond prices and stock prices. (See table)
The rise and rise of the stock market points to the revival in the economy and the rise in bond yields points to worries on deficit, inflation and oil prices going up. Why are the stock markets rising? The Survey finds that the revival part of the story is “robust and broad based”. With the shock of demonetization and the Goods and Services Tax behind us, gross domestic product (GDP) growth for the current year is estimated to be 6.75% and for the next year between 7 and 7.5 %, making India the fastest growing major economy in the world. The reason for the robustness is the implementation of several deep reform initiatives. GST reform has added another 3.4 million indirect tax payers and GST collections are on an upward trajectory. In fact, the overall trend for widening the tax net is positive. The Survey finds that post-demonetisation, there has been a 0.8% monthly increase in new direct tax filers—an annual growth of 10% or about 1.8 million new taxpayers.
Regulations in the financial sector need to keep evolving as the market grows in depth, breadth and complexity. Think of this as the need for road rules and a traffic management system in a large metro—what worked 30 years ago cannot work today. It was possible to travel 5 km in Delhi without running into traffic lights or traffic cops 30 years ago as road traffic was thin. A malfunctioning traffic light today causes hours of traffic jams. As the traffic volume rises, cities resort to one-way traffic rules, higher parking fees and other measures to curb traffic in the city centre. Financial markets are similar; regulations need to keep moving to keep pace with the changing face of the market. Has the market changed? Yes, the size of the assets under management by the three large parts of the retail financial market—mutual funds (only retail), life insurance and the National Pension System (NPS)—crossed Rs34 trillion in FY 2017, up from Rs22 trillion just 3 years ago. Both the volume of money and the number of people on-boarding these products has risen sharply over the past few years. The share of household savings in financial products has been rising and now more than one-third of household savings find their way into financial products. In addition to the urban users of these products, a new category of investors are getting added through the Jan Dhan accounts. These are people who will be first-time users of many financial products as they move from cash, gold and real estate.
The year 2017 was marked by four distinct money events. One, it was the year in which systematic investment plans (SIPs) in mutual funds became a household name, leading to a fat pipeline of over Rs5,000 crore a month (that’s Rs60,000 crore a year) flowing from households to equity funds. Two, 2017 was the year in which investors finally gave up waiting for real estate to recover. Despite the bravado of the builder, broker and banker on the future of real estate, the math just did not add up to support prices that are still very high. Why would you invest in something that yields less than a bank deposit after taxes? Renting clearly was the winner over buying. Three, gold and bank deposits lost their sheen as prices dipped and rates fell. Four, risk-averse investors, who feared mutual funds because of their risk, went all out on crypto-money—not just bitcoin, other cryptocurrencies were also on the investment radar, as were non-regulated initial coin offerings (ICOs). What lies ahead in 2018 for your money? The answer in one line is: a continuation of the 2017 trends.
The debate around the Financial Resolution and Deposit Insurance (FRDI) Bill is good news. The citizens of a country must engage with a potential law that affects their money. I wrote on the issue last week, where I argued that the FRDI Bill proposes an early warning system for crisis in financial firms. You can read it here. Based on their financials, banks and other financial firms will be classified according to their risk. When the risk becomes more than moderate, a set of data reporting protocols kick into place, giving the system ample time to prevent the bank (and other financial firms) from failing. If it indeed does fail, there is a process-driven system for mergers and take-overs. It is only when all of this fails that a bank goes into liquidation. It is like getting a warning 10 miles before the train hurtles towards a cliff.
When you move a system from personality-based solutions to rule of law, there is a painful period of readjustment of the old way of doing things to the new. People, institutions and analysts all need to readjust to the new reality. The recent commentary around the Financial Resolution and Deposit Insurance (FRDI) Bill that is up for debate in the winter session of the Indian Parliament has picked up on one section (section 52) of the Bill, ignoring everything else in the 125 pages, and has resulted in panic about the safety of bank deposits if this bill gets passed. I read the Bill over the weekend and this is my understanding of what the aim of the Bill is and what it means for you.
Bank deposits are the one true friend of a middle class Indian and any threat to their safety is terribly upsetting. The government will introduce a new bill in Parliament in the winter session called the Financial Resolution and Deposit Insurance (FRDI) bill. One section of this bill is causing bank depositors to fear for the safety of their money. I read the bill over the weekend and this is my understanding of what the aim of the bill is and what it means for you.