Demonetization: Misconceptions, problems and solutions

The biggest voice I have been hearing nowadays in India (since Nov 8, 2016, when the Indian Prime Minister Narendra Modi declared Rs. 500 and Rs. 1000 notes as illegal tender of currency from the next midnight i.e. with just 4 hours’ notice) is that it is ‘Unconstitutional’ to Demonetize the currency, especially when there was a limit put on cash withdrawals on the ‘Savings accounts’. So I thought it would be better to understand what it means by ‘Savings Accounts’ or ‘Demand Deposits’

Definition of ‘Savings accounts’
A savings account is an interest-bearing deposit account held at a bank or another financial institution that provides a modest interest rate. Banks or financial institutions may limit the number of withdrawals you can make from your savings account each month, and they may charge fees unless you maintain a certain average monthly balance in the account. In most cases, banks do not provide checks with savings accounts.
_{Read more: Savings Account Definition | Investopedia http://www.investopedia.com/terms/s/savingsaccount.asp#ixzz4TG5IHZn5  Follow us: Investopedia on Facebook}
Savings accounts offer limited use of the funds in the account because they are generally not available for paying bills or buying items directly via checks or debit cards. Some accounts have Internet access, which can be used to move money from the savings account to other accounts, but some savings accounts require the account holder to physically go to the bank in order to deposit or withdraw money.
_{Courtesy: http://www.livestrong.com/article/58780-definition-savings-account/}
These deposits accounts are one of the most popular deposits for individual accounts. These accounts not only provide cheque facility but also have a lot of flexibility for deposits and withdrawal of funds from the account. Most of the banks have rules for the maximum number of withdrawals in a period and the maximum amount of withdrawal, but hardly any bank enforces these. However, banks have every right to enforce such restrictions if it is felt that the account is being misused as a current account. Till 24/10/2011, the interest on Saving Bank Accounts was regulated by RBI and it was fixed at 4.00% on daily balance basis. However, w.e.f. 25th October, 2011, RBI has deregulated Saving Fund account interest rates and now banks are free to decide the same within certain conditions imposed by RBI. Under directions of RBI, now banks are also required to open no frill accounts (this term is used for accounts which do not have any minimum balance requirements). Although Public Sector Banks still pay only 4% rate of interest, some private banks like Kotak Bank and Yes Bank pay between 6% and 7% on such deposits. From the FY 2012-13, interest earned up to Rs 10,000 in a financial year on Saving Bank accounts is exempted from tax. 
_{Courtesy: http://www.allbankingsolutions.com/top-topics/dep1.shtml}

Definition of ‘Demand Deposit’
A demand deposit consists of funds held in an account from which deposited funds can be withdrawn at any time from the depository institution, such as a checking or savings account, accessible by a teller, ATM or online banking. In contrast, a term deposit is a type of account that cannot be accessed for a predetermined period of time. M1 is a category of the money supply that includes demand deposits as well as physical money and negotiable order of withdrawal (NOW) accounts that have no maturity period but limited withdrawals or transfers.
_{Read more: Demand Deposit Definition | Investopedia http://www.investopedia.com/terms/d/demanddeposit.asp#ixzz4TG8EBOqY  Follow us: Investopedia on Facebook}
A demand deposit is money that you deposit into a bank account from which you can withdraw 'on demand' - at any time without any advance notice to the bank. Common examples of accounts that are often demand deposit accounts include many checking and savings accounts. Keep in mind, however, that not all checking accounts and savings accounts are demand deposit accounts.
Manner of Demand: There are many ways you can make a demand on your bank for the funds deposited in a demand deposit account. You can make your demand upon the bank not only before a bank teller, but also through use of an ATM, use of a debit card, online banking transfers and through drawing a check. In fact, if you look closely at a check, you'll see the words 'pay to the order of' right before the line where you fill in the name of the person you're paying. You are actually demanding that the bank pay the sum of money indicated on the check to the payee identified on the check.
_{Courtesy: http://study.com/academy/lesson/demand-deposit-definition-lesson-quiz.html}

All of the above information is picked ‘as is’ from the links provided and these are not my words. So in Legal / Constitutional terms, Banks are free to put limits on any withdrawals from ‘Savings Accounts’ at any time, including cash transactions. In reality, there is limit placed only on Cash Withdrawals from ‘Savings Accounts’ (Teller and ATMs), while one is free to make any amount of transactions using all other instruments like Cheques, Debit Card swipe at POS, Online Payments (NEFT, RTGS, IMPS) or e-commerce transactions linked to the Savings Accounts. By all legal means, Banks do have the right to limit each of these types of transactions from ‘Savings Accounts’ as well.
Another right of the depositor would be to close the account. For this, the depositor can withdraw or transfer all the balance to another account. The Bank may also use the option of Bank Draft / Banker’s Cheque _{(Refer: http://www.investopedia.com/terms/b/bank_draft.asp)} in case there is no cash available in the concerned Bank for withdrawal. So the depositor’s money belongs to depositor at any time.

Having said all this, I agree that there are real problems in Indian Economy post Demonetization. There are few major issues like,

• IT and Telecom infrastructure – in order to use online modes of payments including different wallets, you need to have proper network (wired or wireless) enabled by adequate security, which is not there even in the biggest cities (supposed to Smart-cities) in the country
• Availability of POS machines and alternatives (M-swipe et al) – the merchants either do not want to use these devices or not able to get them
• Infrastructure Charges, Convenience Fees, Service Taxes on non-cash transactions (on non-Government sites) – if you want to make payments on any of the non-Government websites, you will see either of these being charged on top of your payable amount, which is not the case for cash transactions (Tax laws, implementations, official’s behaviour are few of the underlying issues)
• Availability of lower denomination currency – after (ideally before) demonetizing Rs. 500 and Rs. 1000, there should have been enough supply of lower denomination currency tenders to the Banks, so that the real needy people do not suffer

There are also few solutions / workarounds available that can be explored to overcome the problems. (What makes me qualified to put my opinions here? – I have been making more than 90% of all my transactions without using cash for last 10 years, at least. I needed to use the cash at all, because some places like vegies vendors, maids and daily perishables dealers are really not equipped / inclined to make cashless transactions)

• Financial Education to the common people on other instruments of transaction – Banks should really employ few retired people or students to educate the people standing in the queues of Banks and ATMs on how to make cashless transactions and what all alternatives are available. At least this education should reduce the amount of money these people would withdraw in cash (if not convince them to get out of that queue)

• Availability of other legal instruments and mandate as well as incentives to use them – Government, RBI and Banks should really be working on making POS machines and other devices available to the merchants, so that people do not need cash. And more importantly there should be proper infrastructure and legal backing present to make such cashless transactions mandatory, initially there should be incentives provided to all the people to go cashless (not just at Government sites and outlets, but everywhere)

 After all these, what remains is just the people who really want to evade the taxes and charges by remaining invisible to financial institutions aka Black Money hoarders.

The looming recession

It’s been a long time since I blogged. My heartiest apologies to my loyal readers! The reason is quite apparent from the title I believe. According to most of the analysts & self proclaimed experts the recession is already here & it is here to stay for a considerable long time before it gives way to some growth. There had been many financial follies that our Harvard Princeton & IIM grads committed while creating a all gorging monster called derivatives that almost wiped out $3 trillion out of the world economy. This financial blunder is compared to the great depression of the 1930s. Could this be the apparition of the old & painful time that has come back from the underworld to haunt us for coming years?

Well let us first have a look at the reasons why we are facing this situation. The very base of this problem is faulty valuations of the assets held. It all started with the housing bubble in California. The root of this bubble lies with faulty policies brought forward by the No. 42 (read Bill Clinton – a ‘Democrat’ of course – republicans need not be happy for electing the worst ever president, the successor No. 43 ‘Dubya’) & his supporter the so called legendary Alan Greenspan – ex-Fed chief. They came together in a conspiracy of reducing the interest rates to such a historic low that anyone & everyone on the streets of US was capable for getting a housing loan. Obviously the demand for houses started increasing to an unreasonable level. People still kept buying such expensive houses & banks kept offering loans for buying such houses, both considering that they have backing of a very stable asset ‘The House.’
Now comes the time for the financial innovators. These loans offered by banks are converted into Mortgage backed CDOs (Collateralised Debt Obligations). They were securitised by the companies like Fannie Mae & Freddie Mac into resalable assets. These assets were bought by investment bankers like Lehman Bros & Merrill Lynch. Add to that another innovation called ‘Derivatives’, which itself has no value of its own but trades on some other asset like the paper money mentioned above. All of the institutions mentioned above are now liquidated. The correction of the prices started when general people realised that the houses they were buying or holding were not worth the prices they were quoting. So the base of all these financial innovation & great boost to global turnover was removed. The huge castles of cards built over such base had to come crashing down.

Other culprits to the disaster are the rating agencies world over, as all these assets were rated as ‘very safe’ before selling them to next buyer. So all the buyers were also under the misconception that their investments were also ‘very safe’. The valuation models followed by the rating agencies & the investment bankers need to be revisited to avoid any reoccurrence of such disaster in future.

In my opinion the even though the current crisis is very serious & the extent of losses booked are very huge; the biggest difference between the great depression & now is the role knowledge & information technology & media will play in resolving the problem. The biggest problem in recession has always been the public perception & sentiments. So far the media has been disgusting in helping the people out. When the prices were rising to a ridiculous level, they were not bothered to inform people about it. Now as the recession is round the corner, the only thing that can help prevent that is the public sentiment & spending that will boost the consumption in economy. If you read the articles in any of the financial periodicals, you’ll lose your appetite; forget about spending your hard earned money in the market.

In the end if anyone asks for my opinion about the whole situation, I’d say that there is problem in the global market & the recession is not here yet but it will be here. But if all knowledge works in the right direction then it won’t be here to stay for a longer time. I believe we have gathered enough knowledge & are equipped enough to come out of it. Particularly the BRIC nations will be the first ones to rise out of it. Now only the time will tell, how good an analyst I am!

A Question to Mr. Thomas L. Friedman

Do you really believe that India has the potential to become one of the superpowers of the world and can she realize it? Especially juxtaposing with Chinese strength and capacity. I have heard Mr. Friedman say this umpteen times, “Chinese roads are smooth now but there lies a big bump on those roads, that is social equity and stability, how they’ll land after hitting this bump will decide their future and for India the road is full of potholes without even footpaths along it, but on a distance it looks smooth and widens into a freeway of prosperity! Just the thing to worry is if the picture is a mirage or a reality. Reason behind this is that India has already setup a good social structure with democracy and a sound judicial model.”

What I would like to request Mr. Friedman is to reconsider his extra optimism about India’s social stability and democratic structure. If he could come back to India and this time not to Bangalore or Bengaluru as it is denounced to be. Well, for example this is our mentality, there oxford adds ‘to be bangalored’ as a new phrase in their dictionary and here we kill the brand that has fetched us most income. The IT story of India is too much different from the core reality of rural and non IT urban population. Including Bangalore we still haven’t figured out any solution to India’s crumbling infrastructure. The most advanced and arguably the richest state of India, Maharashtra is facing 6-12 hours of power cut daily as we just don’t generate enough electricity to fulfill the demand of our industries and our populace. The roads in the country are not even mentionable as Mr. Friedman himself has explained it better.

The things about the infrastructure that he did not consider is the state of our education in the country. We have at least a million engineers and more than 50,000 MBA’s passing out of our universities, still our best of the companies are facing talent crunch, simply because the depth and practicability of the education we provide here is abysmal. The crème class of engineers that get admissions in the IIT’s is just 7,000 and in the IIM’s it’s just 2,000. No wonder these are the most sought after institutes. With simple statistical analysis will tell that the seats available in these institutes are far below the minimum requirement. As if these problems were not enough our horrid government lead by congress, who had been sucking blood out of the subjects of the country, are still not done with it. Now we have passed a resolution in our parliament where 50% of the seats mentioned above will be reserved for so called oppressed class of the society . If you ask anyone in the cities now, the real oppressed class since the freedom has been the so called upper cast, as they have been most neglected by the political parties, though they have been fetching the maximum revenue for this country. What this means that not even 99% of the marks in the competitive exams for these institutes can fetch a seat for you if you belong to the so called upper cast. While for the reserved students the scores are abysmally 40-50%. Now wouldn’t this explain the talent crunch we are facing. As if this is not enough our good for nothing politicians are proposing to bring reservation in jobs also, which will undoubtedly kill our profitability.

The state of our democracy is such, that there is so much intervention by the government in the mundane life of the populace that we cannot imagine a life in a developed country like US or any country in Europe. This is the reason that started the brain-drain from India. Now as the picture started changing with the reverse brain-drain back to home, we have started ruining our future. The politicians are making sure that our poor remain poor even below poverty line so that they will have someone and something to control and manipulate. A common man being literate and knowledgeable is not in their favour, as who will vote for them in such condition. Our learned class doesn’t believe in voting as they know, no matter who becomes the ruler the policies are going to be so called minority oriented.

With given conditions, I would like to ask you Mr. Friedman, does our political and social structure still seems stable to you? Because, if you ask me there are more chances of revolution taking place in India as compared to China and as the history has shown that the only winner that emerges from a revolution is communism or a dictator, which is pretty much the same, taking into account the outcome for the populace. I have another strong evidence backing my claim up. Which party seems to be driving the policies of this country? Which party seems to be growing in confidence and in power? Undoubtedly CPI(M) – Communist Party of India (Marxist), who now are adopted by the Chinese communist party. They call for strikes more regularly than ever. They are stopping any and every reform that will make this country progress through capitalism, liberalism eventually to prosperity. They feel proud about the abysmal era of socialism, brought to you by Pandit Nehru and sponsored by the red army of USSR, the KGB and Stalin. Even though the Russians got rid of that red monster eating their lives, we are getting closer day by day to adopting this monster. Especially when the other nationalist parties like Congress and BJP are in complete disarray, they are the ones seem to be taking control of the situation and as always our businesses are sitting, doing nothing, just waiting for the day when we might be free of this political oppression.

This grim scenario points towards nothing but a prelude to a revolution which will take us Indians back to bleak age of socialism and make us live the miserable communist life for few more years at least. So kindly add this angle to your vision and try to see the picture we fear is just round the corner. If we miss that turn then I see what you are trying to show us, but this turn is imminent and unless we speed up fast enough to miss this turn we might catch the freeway of success and prosperity.

- Umesh Sant

Latent Economic Strength of India

Economics - Another subject that we are learning as future Managers. Here our faculty was explaining us how much latent unrealised potential Indian Economy has. I just reminded me of a movie - SWADES. Let me explain why. There is a dialogue in the movie that says, “In India we have more wealth than any other western country, that is if you consider our culture!” We perceive ourselves to be cultured, tradition abiding people with unmatchable values.

We were told that we in India especially women follow to many values and they are our assets. If we evaluate them in monetary terms they will come out much more than wealth of any country. Again they say that most women stay home being housewives, taking care of children and passing values to them. If they start working, it will add directly to our economy and national income. By (1) earning money for household and being independent (2) spending more money because they have it and they need to pay for the alternative methods used to take good care of their children and family.

Similarly in movie it shows a village where they do not have basic amenities. No Education, Electricity and all the people care about is that they have good culture. What good is the culture in this materialistic world where only mode of survival is to be competitive? The hero of the movie tries to inculcate independent behaviour and self-reliability – sort of autarky to plan for own development.

Well that exactly is the condition of our country. We put forward our values where cannot succeed. We say that what the heck if we are not the most competitive in the world, we have our culture. One thing ahead, try juxtaposing us with China. Chinese economy is growing with 12% per year for more than 25 years now. We are also growing with 8% per year for last decade. But we just cannot reach the Chinese level of growth. Instead of accepting follies what we do is to say that Chinese economy is driven by communist government but we have largest democracy at home; we are lot better, still! For me that is shame! If a communist government can practise this sort of growth then actually a democracy should be able to do better than that not worse. Fact is that for an economy it makes little different if you have Communism or Democracy. What matter are the policies you follow. China is far better on policies front. We just do not have the determination and consistency on the same level from the political compeers.

Unless there is revolution in the way we manage our political matters, our economy can never survive or sustain the growth. Fact is if China can do it, we can certainly do as much if not better than them. There is lot of international and corporate pressure on political front. We are already witnessing the problems everyday, now it’s time to change or perish as ‘Time and tide wait for no one!’

Fuel For Growth

The biggest boost and potentially biggest threat for economy is the price of fuels - for now petrolium products. There is no need to vindicate this statement, as we all know by first hand experience what sent the global liquidity and equity markets spiraling downwards. Of course it was fuel price. It all started with great reduction in interest rates of the banks worldover. That released the liquidity which started looking for better returns. This liquidity got invested in the Emerging Markets (EMs). This inturn gave huge boost for global GDP growth. To sustain this growth world started demanding more fuel.

Here is the cue. The demand for fuel increased with out significant increase in supply. And the biggest cartel in the world - OPEC - did not help resolve matters. End result is that we saw prices of crude oil rising from $30 a barrel odd to current $75 a barrel in 3 years. Astonishingly not even the best of the equity marketsproduced such results. Added to that we had geopolitical tensions in the aftermath of 9/11. All the major oil producing nations were under some sort of pressure - Iraq, Iran, Venezuela, North Korea to name a few. The names themselves tell the whole story. These tensions are nowhere near getting resolved. So the global Economy experts along with yours truly believe that we soon be approaching $100 a barrel.

Why am I mentioning all this? Well this effect is going to matter to each and every one of us, isn't it? how much are you going to pay for fuel for your vehicle? In US they pay $3 a gallon. In India it is Rs.57 a litre in cities like Mumbai. how much more pain can we take? Well fasten your seat belts, we are going on a ride. We are set for secong biggest change in the economy of the world. (Well, for FYI, the first was when Otto invented the I.C. Engines) It is time that we leave this invention to history. We are going to need an alternate fuel sooner that we thought. There are many companies investing lot of money for new technology that will drive our future. Of course Japanese are ahead in this field too. We are getting more Hybrid vehicles, Fuell Cell vehicles (Google these terms if youdon't know). But these are comparatively expensive as of now. But soon they will enter in to mass production mode to help reducing the market price.

Another factor that is going to deliberate this change is that many Auto makers are making loss in business. The giants GM is under pressure and Ford just posted $900mn loss in second quarter of 2006. And the conditions are not getting any better. So what is the solution? Well, if you are planning to buy a Car, now is the last time for conventional vehicles, to produce fair Return on Investment as within 5 years from now, we will be scrapping our good old petrol, gasolene and diesel vehicles.

Bulls vs. Bears

There is extensive debate going on all over the globe, “Are we entering into Bear market?” Lot of things are happening worldwide. We saw global markets in long appreciation mode. We saw emerging markets (EM) appreciating by circa 300% in last 5-6 years. We saw abundant flow of liquidity in the market as interest rates worldwide were carrier low. We saw commodities like metals appreciate by more than 100%. Real estate prices appreciated by about 100%, on average. These symptoms indicate to a BULL market – one of the strongest is past few decades.

Now the things are changing. Interest rates are going up worldwide, led by US Federal Bank. There has been fall in developed markets like ‘DOW Jones’ & ‘NASDAQ’ (USA), FTSE (UK), DAXX (Germany), CAC (France). Followed by about 25% fall in emerging markets (EM). Commodities, especially metals prices have fallen by about 10%. There has been huge fall in US real estate prices; it is expected to be followed by emerging markets. These are inevitable events in this phase of globalisation as emerging markets follow the developed ones. Now back to the main question, “Are we in BEAR market?”

Let’s first see the real meanings of the words BULL & BEAR. Bulls are ones who want the prices to go higher, so that they can sell whatever they had bought at considerably low prices, leaving them with chunk of profit. Whereas Bears are the ones who want the prices to come down, more so to a reasonable level where they won’t be expensive. Now are we in bear market? Not yet! The reason is that we still have not seen rationality in commodity and real estate prices. Common person still finds them expensive, where it started from being cheap. So prices are expected to come down. But not necessarily this is bear market.

Bears like to keep the prices reasonable. What we are seeing in market is huge fluctuation from cheap to expensive and back. This clearly indicates to lack of bears in the market. To explain the current phenomenon, it has to be a correction – a severe one – mainly because we are still floundering for right prices as share markets seem cheap at current level and commodities and real estate still seem expensive. So we can say with lot of conviction that we are still in the Bull market. But there is risk in being in bull market as these fluctuations will persist and it is really hard to determine value of a buy. Another risk is that if we do not see regular short corrections in Bull market for a long time, there will only be one correction and a huge one – just like one we are in, right now. It’s events like these that prove requirement of Bears in market. Without them we’ll never know the value of the things we buy and sell.

So sure way to success is to support Bulls but respect Bears and not ostracise them.

Asian Economy

In reference to the current events unfolding, as we witness all Asian markets plummeting by overwhelming percentage, liquidity in the market tightening and most of the Asian banks raising the interest rates, we need to re-evaluate the future of Asian growth.

Most of the financial experts agree on the fact that we have not peaked out in Asian growth and that we are still in Bull Run, punctuated with strong and sharp corrections. But there are some factors looming over our heads that will keep spooking the market from time to time. First being the fuel price soaring, second being the ‘Godzilla’ of American economy in a disturbed mode. We can associate both this factors to readjustment of American economy. USA has to find alternative energy sources; they just cannot keep guzzling the oil. That is the biggest factor affecting the inflation and with cascading effect, the interest rate. This will keep CPI numbers going down and push them into stagflation and possible economic slowdown.

This cannot but affect the global market, especially Asian markets. The prime reason behind this is that Asian economy is driven by American consumers and American dollars ($). This American phenomenon will not affect to European markets as much, simply because of their lack of dependence on American dollars ($). This can be credited to their innovation for unifying European economy under the umbrella of Euro (€). So this is about time that the Asian countries leave their differences behind for the greater good and bring the dream into reality: fabricate SAFTA and umbrella Asian currency. Asia just has to go forward with it, as it is the quintessential factor of stabilisation and sustainable development. To counter the American ‘Godzilla’ Asian ‘King Kong’ has to be forged. As size is everything. And at this time, when the global balance is shifting to Asia, unity is the only way forward.

Another reason why Asia needs umbrella currency is that Asia has the biggest population, with India and China on its map. The umbrella currency would only boost the consumerism in Asia. With this consumer base Asian growth should not be dependent on American consumers. Asia can have its cake and eat it, too! But not without forfeiting unwarranted vanity. Asia has to think a lot and act even more and without further ado.

- UMESH SANT