Wise Wealth Advisors

D.Muthukrishnan (Muthu), Certified Financial Planner- Personal Financial Advisor

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Archive for the ‘Economy’ Category

Our India is not big

Posted by Muthu on June 17, 2018

I was reading this piece recently.

India has been classified into three as India 1, India 2 and India 3 based on per capita income.

There are 280 million households in India with a population of 1340 million, averaging 4.8 persons per household.

We all belong to India 1 for which details are given below.

India 1 has 23 million households containing 110 million people. The working members of these households are 31 million. So an average a household has 1.3 working people.

The annual per capita income of India 1 is US$8,800 (Rs.0.6 million).

Only 8% of India, 110 million people are upwardly mobile.

10 million iPhone users, 32 million car owners, 37 million credit card holders, 50 million post paid mobile users, 59 million tax payers, 65 million domestic flyers, 24 million international flyers and 20 million ecommerce shoppers; all belong to this top 8% of population categorised as India 1.

India 2 with 104 million people spread among 22 million households has per capita income of US$3000 (Rs.0.2 million). This is another 8% of India which is aspiring to move up to India 1.

India 3 with 1126 million people spread among 235 million households has per capita income of US$1200 (Rs.80 thousand). This 84% is poor of India struggling to survive.

India moving from low income to middle income over next 2 decades would increase upwardly mobile and aspirers.

Only 8% of India can even dream of achieving financial independence. Like many countries, only 1% of population may actually achieve it. We need to keep this in mind.

Also giving needs to be part of everyone’s financial planning. Focus on giving should be on par with consuming and saving. We definitely owe that to the less fortunate.

Posted in Economy, General | 4 Comments »

No Pain No Gain

Posted by Muthu on November 21, 2016

I received a document prepared by Franklin Templeton India on demonetisation. I found the same useful.

I’ve given the key points below. Please read the complete report for more details and better understanding.

1)Overall, we believe that the demonetisation exercise should help to accelerate financialisation of the Indian economy over medium to long term.

2) This measure needs to be seen in the context of other far reaching measures effected by the current government, including GST, Aadhar, Jan Dhan Yojana and Unified Payment Interface (UPI). All these measures put together should help in shifting significant portions of the informal economy (estimated at 40% of GDP) into formal economy.

3) This could in turn improve productivity by reducing frictional inefficiencies and improve the government’s tax revenues led by significantly better financial trails over medium to long term. These measures would give more flexibility for the government to manage fiscal deficit, as also potentially enable to shift to lower interest rates in India.

4) However, the demonetisation measure is likely to be negative for growth in the very near term until the level of cash in circulation reverts to normalcy. A sudden withdrawal of Rs.14 lakhs crore (9% of GDP) represents substantial monetary tightening, which could result in deflationary forces due to lower aggregate demand.

5) We believe that there exists a scope of 50 bps policy rate cut by the RBI from current levels over next one year, which may be undertaken in order to offset the deflationary impact.

6) Meanwhile, the flow of substantial cash holdings into bank deposits will mean that banking system will be flush with liquidity and CASA (Current Account and Savings Account) balances are expected to improve. As credit demand is likely to be muted for next couple of quarters, there would be very limited opportunities for banks to lend these deposits. The possibility of this money being channelised towards government securities may lead to a bond rally.

7) We expect aggressive rate cuts by banks, thus helping RBI in achieving better monetary transmission. The lower interest rates, along with a return to normalcy for cash in circulation should set the stage for a stronger recovery in aggregate demand in financial year 2017-18.

I wrote my last piece on the very next day of demonetisation. Now I’ve a better understanding of how benefit would accrue to government.

It is unlikely that the entire Rs.14 lakhs crore that was in circulation would come back to banks. Black money would be a sizeable part of this. The estimates range from Rs.1.5 lakh crore to Rs.5 lakh crore. There are some who argue that entire money would somehow find its way to banks. Even if that happens, the (earlier) untaxed part of that money would result in huge tax revenues for government.

For now, let us assume Rs.3 lakh crore does not come into bank accounts. That is the black money destroyed in this demonetisation drive. Government by necessary legislative changes can ensure that is no longer in the books of RBI as liability. As assets of RBI remain the same and liability is reduced, this excess Rs.3 lakh crore can be transferred to reserve. From reserves, RBI can eventually transfer the same to its P&L (Profit & Loss account) as income and then pay the same to government as dividend. Either government is going to tax and penalise heavily the unaccounted money coming to the system or it is going to get a hefty dividend from RBI or most likely a combination of both.

Thus black money is transferred from the hands of corrupt individuals to government of India.

Posted in Economy, General | Leave a Comment »

Slow growth world

Posted by Muthu on June 25, 2016

You would all have read about Brexit (Britain’s exit from European Union).

It would take years for us to understand its impact on the global economy. The majority view is that it would be negative.

The general feeling across the world, especially among poor and middle class is that of anti-globalisation and anti-immigration.

After 2008 crisis, global economy is plagued by deflation, slow growth, unemployment and rising inequality. So there is lot of fear and uncertainty in the minds of the people.

China, which was growing at higher rate for last 3 decades has fallen to around 4% growth rate now (nobody  believes the data Chinese government provide).

There have been questions around even our own GDP data but even the critics acknowledge that we would be growing around 6%. Our official rate of growth is around 8%.

In a slow or no growth world, even 6% is an excellent growth rate.

This government has been doing a lot to ensure that we continue to grow at a good rate. I was having a very high opinion of this government and it has come down few notches after seeing the way they handled Raghuram Rajan issue.

We are an extremely poor nation with only $2 trillion GDP and around $1500 per capita. We need to grow at 8% to 9% for next 2 decades to catch up with where even China is now.

I’m fairly confident that the government would continue to work to make this happen.

Hopefully, if all goes well, we may be a $10 trillion economy with $7500 per capita in 2030. We would then be a middle income country. A majority of our population would be out of poverty.

The biggest challenge would be generation of employment. We are able to create only 5 million jobs a year whereas the requirement is 12 million. On the other hand, many countries in the world face labour shortage.  The best option would be to focus on skill development (no country would want unskilled labour) and encourage emigration. If the employment gap continues to persist, it would become both a major social and economic problem.

As I’ve mentioned before, the journey from $2 trillion to $10 trillion provides us excellent opportunity to grow our wealth through equity investments. In a slow growth world, our growth at a higher rate (though from a very low base) is a boon for equity investors like us.

It is very difficult to guess how Brexit would play on our stock markets in the months to come. Though Brexit has less impact on our economy, it may have a significant impact on the markets, if foreign investors decide to pull the money out.

However, as always, please do remember that in the long run markets grow in line with earnings. As long as the economy and corporate earnings are growing, these short term blips can be completely ignored.

There is nothing new you need to do now. Stick to your SIPs and stay the course.

Posted in Economy, General | 2 Comments »

Good years are ahead

Posted by Muthu on April 16, 2016

It was good to get in touch with each of you for the year end review. I’m pleased with the results. Other than those of you who started investing during last 2 years; everybody else has done well. Those of you who have started a year or two ago, would start seeing better results in next few years.

I’m grateful that all of you have internalised the concept of SIP and sticking to the discipline through ups and downs.

I wrote in January that we’ve entered a bear market. A 20% fall from the previous high is considered as a bear market. Markets lost heavily in January and February. The interesting thing is that the market has started rallying in March and at the time of writing this, has recouped the losses made during the first two months. I wouldn’t be surprised if it crosses it’s all time high this year itself.

Globally things are not looking bright. India is considered as a sole bright spot in an otherwise gloomy scenario. As explained before, budget was very good. Government is sticking to fiscal discipline. Inflation is continuing to come down. RBI is targeting 4% inflation over next 2 years. As inflation comes down, interest rate is also continuing to fall. Recently RBI reduced the interest rate further by 25bps (0.25%). Good monsoon may lead to further interest rate cut. RBI, through various measures, is increasing the liquidity in the economy.

After 2 years of insufficient rains, an excellent monsoon has been forecasted for this year. Rajan, a man who measures his words, mentioned last week that Indian economy is on the verge of a revolution. Growth has started picking up in certain pockets. Corporate earnings growth are expected to pick up before end of the current financial year. The industrial production has started picking up. The seeds sown by the government and RBI for the last 2 years have started showing results.

Someone on Twitter mentioned that markets are influenced in short term by liquidity, medium term by sentiments and long term by earnings. Being the bright spot and offering stable growth, India would attract both liquidity and positive sentiments. More than these two, as earnings pick up; the long term growth story would be intact.

If we look at long term, the future of India, its economy and companies is extremely bright. Before end of the next decade, we may see India becoming a $10 trillion economy from the current $2 trillion. Good companies grow at a better rate than the overall economy. So we can expect around 15% annualised return from equity funds in the next 15 years. This means wealth getting multiplied by 8 times.

I feel that the future performance of economy and markets would be much better than past. I wish that both Modi and Rajan get at least one more term. The growth in economy and earnings may be more stable and less volatile. However markets, by its very nature, would continue to be volatile. The journey would continue to be bumpy. You would see many bear markets as well in next 15 years. However continue to focus on the bigger picture.

In every bear market you would come across people who say ‘buy & hold’ no longer works, equity is dead and SIPs are no good. Learn to ignore them. They would change their tunes in the next bull market.

‘Buy & Hold’ of excellent companies and good funds would continue to work. In India, equity would be THE asset class for next 2 decades. SIP is the best way for an average investor to participate and reap the benefits of equity.

The sceptics would never make any meaningful money. By being optimistic on future of India, you would create good wealth and become financially independent.

All the best.

Posted in Economy, General, Wealth | 4 Comments »

Move in a right direction

Posted by Muthu on March 2, 2016

Vajpayee government and RBI under Dr.Bimal Jalan made structural changes and reforms during their tenure resulting in excellent economic growth from 2003 to 2007. Corporate earnings multiplied and hence stock market also grew immensely. The seeds were sown by NDA and the fruits were reaped by UPA-1.

Modi and RBI under Dr.Rajan are doing a similar or even better job for the economy. We’ve written in the past about many excellent initiatives of this government and RBI.

The budget presented on Monday is another move in the right direction. The government is sticking to fiscal discipline and has given thrust for growth of rural India. As you might have all read the newspapers, I don’t want to repeat the salient features. All I can say is that in next couple of years or even earlier, we would start seeing our economy taking off.

Corporate earnings would also start showing excellent double digit growth. Then stock market growth would happen automatically. Given that government is following fiscal discipline and inflation is also under control, RBI may take initiative to cut rates further. The direction of interest rates is downwards.

I expect our economy to have high growth and low inflation. In large economies, we probably have the best government balance sheet. This balance sheet got strengthened further by recent budget. So at some point, being the only place where growth is, FII money would start flowing again.

You’ll develop the same conviction I’ve once you start seeing the results in next one to 2 years. Till then, accept the short term pain for the long term gain.

Those of you who are worried about EPF taxation, please note that 40% of the corpus is tax free. The remaining 60% also would not be taxable if you choose to invest in annuity. Only if you want to consume the 60%, then you’ve to pay tax. This move is to make EPF on par with products like NPS. This is government way of nudging people to opt for pension instead of consuming the entire retirement corpus.

For now, PPF continues to be tax free. Also for now, long term capital gains from equity continue to be tax free. But I would not be surprised if these also come under taxation within next few years. This government is focused on reducing all kinds of subsidies which include tax subsidy. Subsidies would be restricted and focused on the really needy.

So good days are really ahead and we are moving in the right direction. Hold on and stay the course.

Posted in Economy, General | 5 Comments »