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| December 11, 2015 |
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Impact 
Trust and transparency are important to sustain a long-lasting relationship. Be it the relationship of parents and children, husband and wife, between friends, business partners, and even of financial advisors and their clients. And if these relationships are as sacred and human as the elements that build them, then, can the relationship between the government and citizens be an exception to this principle? When we talk about transparency, we talk about open communication and being fair in how others are treated under various circumstances.
Look at these 4 scenarios:
Scenario 1: You have a business partnership with a person you trust. But, he underreports production levels, and silently sells the goods in the open market, pocketing the profits.
Scenario 2: A financial advisor deludes a client, who’s a friend, just to earn a higher commission on New Fund Offers (NFOs)
Scenario 3: A close friend asks you for a favour; you pull out all the stops to help her. After a few days, you ask for a little assistance; she conveniently gives you a cold shoulder.
Scenario 4: 4. Lakhs of people lose their livelihood because of developmental projects. The rehabilitation programmes of project-affected people are always promised on paper but rarely get fulfilled.
These scenarios showcase how lopsided and fragile a relationship can become in the absence of trust and transparency. Citizens continue to wonder when the Government will understand this fundamental.
Consider this...
The prices of crude oil have fallen by approximately 60% over last 18 months in the international market. But in India, petrol and diesel prices have come down by no more than 15% over this time period. This level of deviation in prices is bizarre, considering India has decontrolled petrol and diesel prices.
The table below reveals how petrol prices are determined in India:
Price Breakups
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Particulars
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Break-up petrol pricing
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Break-up diesel Pricing
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Refinery Transfer Price (RTP)
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23.76
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24.66
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Dealer’s price
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27.1
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27.6
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Excise Duty
| 19.06 | 10.66 | |
Dealer’s commission
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2.26
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1.43
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VAT (Applicable in Delhi 25%)
| 12.11 | 6.88 | |
Retail Selling Price at Delhi
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60.53
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46.57
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Pricing effective from December 01, 2015
(Source: HPCL, PersonalFN Research)
However, the Government wants you to be tolerant and responsible...
- The hygiene standards in the country are low, so Indians have been asked to pay Swachh Bharat cess.
- Erratic monsoon has affected sowing and production of pulses; hence, the common man is expected to accommodate the high prices of yellow pigeon peas (toor dal). Hoarders make hay while the sun shines, but you are expected to bear the brunt.
When it comes to passing on some of the price benefits to the common man’s pockets; the Government finds ways to channelize it differently.
Is NDA Government ill-advised?
Since the NDA Government came to power in May 2014, the excise duty has gone up more than 100% from Rs 9.48 to 19.06 per litre. Indirectly, the Government refused to pass on the benefit to the consumers, under the plausible excuse of raising revenue. Similarly, the central excise duty on diesel has gone up from Rs 3.65 to Rs 10.66. (Put full form here) (VAT) charged by various State governments decides the final retail price in the respective states.
For example, in Mumbai, you shell out Rs 67.55 per litre of petrol, while diesel may cost you Rs 53.78 because the Maharashtra Government charges higher VAT.
High petrol and diesel prices will worsen inflation of food prices. The cost of transportation is one of the most important factors in determining retail prices for life’s daily essentials.
Is the Central Government maintaining transparency? Evidently, not.
Are the State governments maintaining transparency?
The fact is, taxing petrol and diesel heavily is the easiest source to generate revenue as both are essential commodities. Only the Government knows what it has decontrolled. It has possibly allowed oil refiners and oil marketing companies to turn profitable, expecting its taxpayers to fund the deficit in revenues. Interestingly, the Government authorities are confident of curbing the fiscal deficit to 3.9% of GDP and expects a shortfall of 50,000 crore in the estimated revenue for the current fiscal year.
This affects how much you can gain from your investments.
When the cost of living goes up; it is expected that banks pay you fair interest on long-term deposits, so as to protect the real value of your money. Therefore, inflation and interest rates are interlinked. With higher interest rates, the cost of deposits to the bank increases; to recover this, banks, naturally, issue loans at higher interest rates. And, when borrowers pay a higher rate, rewards/profits are eroded, and personal balance sheets are affected.
In finance, there has to be transparency; if inflation is low, all sections of the economy should reap benefits. Similarly, when inflation rises, all sections bear the burden. In the real world, Government policies in countries such as India sometimes block the channels through which the effects of inflation and interest rates flow from bottom to top and again from top to bottom. This is done essentially to balance out their socio-economic objectives. The poor aren’t expected to share the equal burden of high inflation.
Is RBI turning a blind eye to non-transparent behaviour?
Reserve Bank of India (RBI) has been insisting that banks and other financial institution cut lending rates. RBI has slash policy rates by 125bps since January 2015. One basis point is 1/100th of a per cent. Whenever RBI cuts policy rates, the short-term borrowing cost for banks goes down. However, banks have been reluctant in passing on the benefits of lower policy rates.
They claim their cost of lending is high thanks to higher interest rates offered by the Government on the small savings schemes. Banks argue that they have to pay more to attract deposits, as they directly compete with small savings schemes.
The RBI has been insisting that the Government should lower the interest rates on schemes such as PPF, National Savings Certificates, (NSCs) and post office deposits.
Do you have a choice...
If paying excess on fuel wasn’t enough, now the rate of interest on your deposits may be further slashed. Vegetables may become dearer; taxi services may be reduced to a luxury, and funding your child’s higher education could steadily become a distant dream. Corporate taxes are being reduced, service taxes are being increased.
Some economists talk of deflation and softening of demand. When will this Government realise the economics of a “demand” revival? A crystal ball may be a poor forecaster. Election campaigns are fought with one agenda, and the Government is run on another agenda.
Good luck readers. You can counter the adverse situation with better planning and efficient management of your monetary resources. If you often struggle to plan your finances; you may opt for expert advice. Lastly, make sure your financial advisor is not only competent but ethical too.
Do you think the Government must be more transparent and fair to citizens? Share your views here
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Impact
Diversification is a way to reduce the risk associated with investing. PersonalFN believes in intelligent asset allocation and optimised diversification helps you earn superior profits as compared to following hot trends.
It seems Reliance industry is also of the same view. This is why, despite of having a trillion dollar petrochemical business; it has been heavily investing in the next generation telecom business. Other Indian companies might be slowing down on expansion plans as the demand is still weak. But the Mukash-Ambani-controlled Reliance Industries has leapfrogged with Reliance Jio. In the past, they moved away from the textile business to create an empire in the petro-chemical business.
As you know, this is a giant corporation; its actions impact many other corporations apart from the company itself. It has mutual fund holdings of about Rs 43,000 crore. Out of which, it recently transferred 15,000 crore from income schemes to liquid and liquid plus schemes. This is a way of keeping funds ready to make high ticket payments. The company also wants to reduce debt on its books. Apparently, the schemes Reliance has been withdrawing from are large enough to handle this redemption pressure. Had it not been the case, small investors would have suffered, as sudden outflows on a high scale, affect Net Asset Values (NAVs) of funds.
PersonalFN, therefore, advocates being careful about the asset base of funds you invest in. It is not to say that smaller funds are risky, but they need to be sufficiently padded to handle big redemptions.
Leaving the size of a fund aside, there are many more things you need to concentrate on before investing in mutual funds. In case you don’t have time to shortlist good funds, you may want to try out unbiased research services provided by PersonalFN.
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Impact
The landslides in Himanchal Pradesh and floods in Chennai may appear as natural calamities, but it would be erroneous to deny the role of the man in these incidents. Like parliamentarians, nature is also losing its balance. The end result is a stalled parliament, stalled cities, and traffic logjams. In Parliament, personal rifts have been garnering national importance which has led to loss of crucial time, impeding the passage of important legislative reforms. On the other hand, apocalyptic flood in Chennai, Kancheepuram, Cuddalore, and Tiruvallur has finally started receding, leaving behind heaps of debris and garbage to be cleared. The landslide has blocked National Highway 21, the national highway connecting Chandigarh and Manali. In the end, the common man bears the brunt, geo-economically and socio-politically.
It is anyone’s guess when the legislative bills will manifest as reforms, and how long it will take to recover from the losses, clean up debris, and get the spirit of Chennai-ites back on track. How many landslides are still to be witnessed on the Himalayan ranges is anybody’s guess too.
But if you are an investor and especially the one who’s trapped in two of JP Morgan debt schemes; there’s some good news for you. There was a glimmer of hope of JP Morgan being able to recover the Amtek Auto debt; SSG. capital has made it possible. This Hong-Kong-based vulture fund has bought Non-Convertible Debentures (NCDs) from the troubled JP Morgan debt schemes. The fund house is taking a hit of 15% on its investments.
To know more about this and PersonalFN’s views over it, please click here.
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Impact I knew it was time to sell when my shoeshine boy gave me a stock tip -Joseph P. Kennedy
Joseph Kennedy, a millionaire, and a famous politician who was astute and avoided the great depression in 1929. He sold off his entire portfolio just before the markets crashed in the U.S. Incidentally; a shoeshine boy had tipped him off about the hot stocks. He then realised that everybody was optimistic about the market and chasing returns. This called for action, and he was acted well in time to sell.
Can we expect the reverse now
In today’s context, the exact opposite may hold true. These days everybody is bearish on the markets, fearing the Federal Reserve Bank, FED lift off. Anticipatory Fed action has already intimidated market players. Equity markets across the globe have witnessed a fall whenever the Fed has hinted at a rate hike. Economists, policy markets have been expecting Federal Reserve (Fed) in the U.S. to raise interest rates for long. Now even non-finance people have also started discussing the impact of the Fed action on markets.
To read more about this and our views, please click here.
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Mutual fund advisors have been selling New Fund Offers (NFOs) as well as other existing funds that earn them high commissions. However, this practice is to cease soon as mutual funds have now agreed on compensating their distributors at a uniform rate. The Securities and Exchange Board of India (SEBI) has already advised fund houses that non-complying with the uniform commission structure will push the regulator to step in.
PersonalFN is of the view that although such initiatives may discourage distributors from mis-selling financial products; they may not be enough to eliminate mis-selling. PersonalFN encourages you to seek advice from a trustworthy financial advisor.
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Deregulation: The reduction or elimination of government power in a particular industry, usually enacted to create more competition within the industry.
(Source: Investopedia)
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Quote : “If it is in the headlines, it’s in the stock price”
-Bill Miller
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