How Demonetisation Risked India’s Economic Growth   Mar 03, 2017

March 03, 2017
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We are in March…


Mercury is soaring.


And besides rising temperatures, there’s much more heating up the atmosphere.


Hard work v/s Harvard  


National v/s Antinational


Merit v/s Quota


The triggers for that adrenaline rush are plenty, but the question is: will anything beyond mere emotional reactions and counter-reactions remain?


Not very long ago, there was a long-drawn-out debate on Demonetisation—an unprecedented move that crumbled the entire country to their knees.


There was a close consensus among economists that India’s economic growth will tank in the foreseeable future.


However, their estimates of the quantum of fall differed substantially from that of one another. Some predicted a moderate fall, while others expected a steeper fall or even a contraction in Q3 of Financial Year (FY) 2016-17. 


India’s Q3 Gross Domestic Product (GDP) has proven most of them wrong. The GDP has grown at 7.0% between October 2016 and December 2016. Gross Value Added (GVA) has come in at 6.6% in Q3 FY 2016-17.  The difference between GDP and GVA suggests that the Government has recovered higher taxes and paid lower subsidies in the quarter gone by.


Predicting economic trends is difficult indeed.


But now there’s a new controversy mushrooming…


Are we turning “a little Chinese” with how the GDP data is reported?


Many economists and ‘experts’ now believe, the GDP growth, on the hunch-back of demonetisation, looks too good to be true. And, 10.1% growth in the private consumption raises even more eyebrows.


Break up of growth…

Industry Q3 Growth rate (Year-on-Year)
Agriculture, forestry & fishing
Mining & quarrying
Electricity, gas, water supply & other utility services
Trade, hotels, transport, communication and services related to broadcasting
Financial,  real estate  &  professional  services
Public administration, defence  and Other Services

(Source: Ministry of Statistics & Programme Implementation)

Agriculture, mining, and manufacturing growth has been robust. At 3.1%, the growth rate in financial, real estate, and professional services is weaker (much on the expected lines).


Puzzling numbers…

  Q3 Growth rate (Year-on-Year)
Private Final Consumption Expenditure (PFCE) 10.1%
Government Final Consumption Expenditure (GFCE) 19.9%
Gross Fixed Capital Formation (GFCF) 3.5%

 (Source: Ministry of Statistics & Programme Implementation)


The robust numbers PFCE and GFCE has provided the props to the overall growth number. However, 3.5% GFCF growth suggests recovery in the private capex cycle continues to be fragile.


Read this before you doubt the GDP numbers…

Let’s not forget, the GDP is calculated on the basis of figures reported to the various Government agencies and are supported by actual data. As you would know, cash dependent informal sectors form a huge part of the Indian economy. Last year in the months of November and December, the indirect tax collection of the Government shot up 26.2% and 14.2% respectively.

Do these figures indicate that the black economy is now turning white? Unless the cash deposits of a businessman during demonetisation are supported by the corresponding sales receipts, he may find it difficult to escape. As per RBI, more than 90% of demonetised currency has already been returned to the system.


Plus, the growth in private consumption is also on account of higher growth in agricultural output, which contributes close to 30% of private consumption.

Do these points have anything to do with a resilient 7.0% GDP growth in Q3 FY 2017? Hopefully, the Government and the taxmen are tracking these events carefully.


How should investors react to the GDP data?
PersonalFN believes investors shouldn’t speculate on the direction of macroeconomic indicators because they are too complicated to predict. For instance, the core sector growth in January has moderated to 3.4%, but that in the manufacturing industries has stayed high at 8.3%.


Quite a confusing trend, isn’t it?


But be it as it may.          


Instead we suggest you to focus your financial plan and stick to your asset allocation that considers your goals and risk appetite.


You shouldn’t sell in panic or buy on optimism.


‘Invest regularly’ is the mantra.


Systematic Investment Plans (SIPs) offered by the best mutual funds enable you to channelise your savings to create wealth in the long run.


In case you are unsure about the best mutual schemes to invest in, opt in for unbiased mutual fund research services offered by PersonalFN. And if you need handholding while investing, seek the services of a Certified Financial Guardian, who is a symbol of Trust & Respect.


It is now easier to withdraw money from your Employees’ Provident Fund (EPF) account. The Employees’ Provident Fund Organisation (EPFO) has decided to simplify the process.


Some notable changes are as follows:

  • Until now, one had to fill up multiple forms, depending on the purpose of withdrawal. Now there will be a common withdrawal form.

  • If you are opting for a premature withdrawal for funding your children’s post matriculate education, EPFO won’t ask you to submit any supportive document.

  • In the case of early withdrawals, there won’t be any need to attach utilisation certificates, like earlier.

  • If you wish to withdraw money for your children’s marriage, EPFO won’t ask you to enclose a copy of marriage invitation card.


Not only that,


If you have linked your Aadhaar number to your EPF account, you can submit a withdrawal request even without an attestation by your employer. Those who haven’t complied yet, are advised to comply by March 31, 2017.


Speaking about the development, the EPFO noted that, "To add further convenience, these forms (different form for various advances and withdrawals) now have been further simplified and replaced with a single page Composite Claim Form (Aadhaar). This new Composite Claim Form (Aadhaar), can be submitted without the attestation of employers."


PersonalFN is of the view that, although withdrawing your provident fund money has become simple, you shouldn’t touch these savings until there isn’t another alternative or emergency.


EPF savings are meant for your old age. Moreover, with better retirement planning, you can live a blissful retired life without opting for the easy-withdrawal option.


Low-cost housing is high on the agenda of Government. 

In the Union Budget 2017-18, the Government awarded “infrastructure” status to the affordable housing projects. 

Infrastructure status not only opens up more low-cost funding options to these projects, but the taxation benefit offered to them encourages developers to launch more such projects. 

Now it’s the time to provide one more booster shot to affordable housing

Employees’ Provident Fund Organisation (EPFO) is set to launch an affordable housing scheme for its 4 crore subscribers. 

About two years ago, the EPFO had appointed a committee to consider the proposal of housing scheme for people working in the formal sector. The panel has nodded in favour of the scheme. 

As a result, securing advance from your EPF contributions and pledging future contributions as future EMIs will soon become a reality. 

As per the various media reports, the scheme might be launched soon after the code of conduct, on account of state assembly elections, gets lifted. In other words, once the final round of Uttar Pradesh elections is concluded, the scheme might be launched anytime. 

Although the details of the schemes are yet to be announced formally, it looks like the employees of the same organisation along with their employer will have to form a 20-member housing society group, to derive benefits under EPFO promoted housing scheme. 


To read more about this story and Personal FN’s views over it, please click here.


Have you heard about Asset Management Companies (AMCs)?

Of course, you have, especially if you invest in mutual funds. 

However, the term AMC may have different connotations. 

Those managing your investments, try to acquire sound assets and maximise your gains. They avoid taking undue risks. 

Can you imagine, some AMCs purposefully invest in poor quality assets, and they especially look for troubled companies? Their primary aim is to clear the systemic mess.

In coming days, the Government may encourage private and Government-funded AMCs, which also called Asset Restructuring Companies (ARCs), to take over the stressed assets of banks.  

Dr Viral Acharya, Deputy Governor of RBI, has advocated a two-step strategy to address the systemic problem of bad asset quality. As you may know, 42 Indian banks have amassed close to Rs 7.32 lakh crore worth Non-Performing Assets (NPAs) on their balance sheets at the end of Q3, FY 2016-17. 

In the second half of 2015, RBI had started taking the asset quality review of banks. However, nothing much has changed since then, and the recovery of troubled assets has been moving at a snail's pace. Dr Acharya, in one of his speeches recently, warned against the dire consequences of status quo.  According to the RBI deputy governor, "It is reminiscent of weak banks and stagnating growth witnessed by Japan in the 1990s, with repercussions to date, and by Italy since 2010. Japan has experienced, and Italy, is in my opinion experiencing, a lost decade. I believe we are at crossroads and have an important choice to make.''


In short, he's warned against the potential downside of maintaining status quo and dragging the problem to future hoping that, something will happen (naturally) that will help to address the problem at hand. 


To read more about this story and Personal FN’s views over it, please click here.


In August 2014, RBI allowed banks to charge their customers a fee even on basic transactions such as deposits and withdrawals, beyond a set number. That ‘autonomy’ seems to be working against the common man now, especially against those who have accounts with India’s large private sector banks.


If you have a savings account with HDFC Bank, ICICI Bank, or Axis Bank, be ready to shell out as high as Rs 150 for beyond first 4 (5 in the case of Axis Bank) deposit or withdrawal transactions.


 However, HDFC Bank has already clarified that the change in charges on deposits and withdrawals are only at branch level and there is no change for the transactions at the ATM level.


It seems banks want to protect the deposit growth they witnessed during demonetisation, which is why they are creating barriers to easy withdrawals.


If you want to save your costs, you have two options—go digital or shun banks that charge you exorbitantly.


Will RBI take a pro-consumer stand?


Let’s wait and watch.


Gross Value Added -GVA: Gross value added is a productivity metric that measures the contribution to an economy, producer, sector or region. Gross value added provides a dollar value for the amount of goods and services that have been produced, less the cost of all inputs and raw materials that are directly attributable to that production.

(Source: Investopedia)
Quote: "Pundits forecast not because they know, but because they are asked." -- John Kenneth Galbraith


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