What is abc, xyz about economics.

Nilgiri

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#1
Please ask your questions/inquiries here about economics (India or otherwise). I will do my best to answer and also welcome a debate/discussion from fellow economy enthusiasts.
 

Shashank

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Is it right time to invest in stocks or mutual funds ? I feel market is already very high at current level and may face a downward correction.

I am not an expert and its my feeling without any substantial information to back it up.
 
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@Nilgiri
Good to see you here!

I have been thinking a lot about measures of economy. You know the age old debate on which measure of GDP is better. IMHO, GDP PPP expressed in constant USD or an inflation adjusted currency makes most sense because people produce and consume goods and services and not fiscal instruments. But I have heard a lot of booms and baams from Chinese folks in a forum far far away. I know the usage of these terms is a lot political, but if we are measuring the size of economies and especially with a view point of comparing their relative sizes, which measure of economy is most apt?
 

Paro

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#5
@Nilgiri
Can you tell about the FRDI Bill, its advantages or disadvantages and the controversy over it in a short summary. I'm a bit confusing whos word to take on this issue. If possible can you provide some material. Thank you in advance.
 

dray

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@Nilgiri
Can you tell about the FRDI Bill, its advantages or disadvantages and the controversy over it in a short summary. I'm a bit confusing whos word to take on this issue. If possible can you provide some material. Thank you in advance.
I didn't write it, but I mostly share the same view on it.

Credits: Shri. Kn Murali, CA

Financial Resolution and Deposit Insurance Bill (FRDI) – Facts, Myths and fallacies

Huge hue and cry is made in social media and many informed people are asking for signature campaign to protect depositors. As usual, uninformed people fabricate the facts and roll out stories in social media, it gets shared and forwarded without any one really understanding the impact.. It has already created a ‘’fear psychosis’’ in the minds of middle class population..

Let me try to explain as much as I know:

Scenario 1 – XYZ private limited company running a factory. The company has taken loan of Rs.1 crore from a bank. 100 people are employed in the factory. The company got into financial mess, the employees are not given salary for the last four months. The bankers seal the plant and proceed to sell assets of the factory. Some other person bids for XYZ P Ltd and the realization is say, Rs.50 lakhs by selling the assets of the bank.

The bankers have to pay the unpaid salaries of the employees first, if anything is left out then only banker can take the money to themselves. For example, unpaid salaries of the employees is Rs.60 lakhs, the banker will have to apportion the entire money to the employees and will have to go high and dry without any recovery. The priority is given for the unpaid salaries of the employees.

Scenario II – Government comes to the rescue of the factory – this is known as ‘’Bail out” provision where there is some help coming from outside – Indian Bank went through this issue when great M Gopalakrishnan was CMD of the bank. Government infused additional capital to rescue the bank. Another good example is Ramesh Ghelli’s Global Trust Bank, Government came to the rescue by requesting Oriental Bank of Commerce to take over the bank with all assets and liabilities – Sathyam Computers is another case where the company got into financial scam, Government intervened and Mahindra took over Satyam.

Scenario III – Instead of rescuing bank through external support, Government can intervene to rescue the factory through the assets owned by XYZ itself (example) – if any rescue effort is made through the internal accruals of XYZ which is known as “Bail in” provision. (This is one section which is hotly debated now, many middle class income group is making a hue and cry)

Myths & Fallacies

After explaining the above three scenarios, let me give another illustration – if there is a bank which goes for financial mess – will the depositors get their money or not?? Way back in 1961, there is a provision in Deposit Insurance and Credit Guarantee Corporation Act – as per the provisions of this law, a depositor has full protection for the deposit of Rs.1 lakh plus interest accrued there on - anyone who has kept deposit above Rs.1 lakh, the Act provides maximum protection for Rs.1 lakh + Interest.

The act came in 1961 and applicable even today – for example a customer has deposited Rs.5 lakhs in a Nationalized Bank, the bank goes for insolvency, the depositor is protected only upto Rs.1 lakh. This is the current provision and please do not be under the impression that entire deposit of Rs.5 lakhs is fully protected. Why are the people raising big hue and cry now when the provision is applicable way back from 1961 onwards??? Neither Arun Jaitley nor NaMo brought anything new at this stage, but a perception is created as if there is a big danger awaiting depositors in future.

Please understand that all banks pay a premium to protect depositors with Deposit Insurance and Credit Guarantee Corporation (managed by Government of India) to offer the protection for Rs.1 lakh.. Though banks pay premium to protect their depositors, there has been no story of any bank fall out in the last 70 years.

Draft FRDI bill was placed before people way back in Sep 2016, people were given 20 days’ time to revert with their views, objections. Cabinet approved the draft bill in June 2017 and placed before Parliament on the last day of Monsoon session of Parliament. Government appointed standing Committee of Joint Parliamentary Committee to look into the bill.. There is no iota of truth that people are not taken into confidence or no opportunity was given to stakeholders to express their views.

The present bill (if passed in the current form) creates new authority called “Financial Resolution Board” which would operate in addition to other regulators like RBI/SEBI/IRDA on this aspect. I do agree that creation of one more authority cannot be solution for the issue of safety of money of the depositors.

What the new Bill provides?

If a bank is likely to become insolvent, the priority of the payment would be in the order of a. Deposit Insurance b. Charges for the Financial Resolution Commission c. Unpaid salaries of the employees for the last 24 months d. Salaries of employees for the next 12 months e. Uninsured deposits f. Unguaranteed Loans etc etc., Effectively, uninsured deposits will come only in the fifth order of preference in the new bill. This is nothing new provision, it is same for the last 56 years.

What can be the solution to the issue of guarantee to depositors?

Current level of insurance of Rs.1 lakh which was fixed 56 years back, can be enhanced to a far higher limit. The current bill does not mention any limit as of now, it is for the Parliamentarians to debate and arrive at… In my view, Government can increase the limit of protection to depositors to Rs.25 lakhs. Even if it means, the depositors have to forego small portion of money from their packets, many middle class investors would not mind paying the premium. This is the most practicable and implementable solution.

Facts

Please do not believe the stories floating in social media and in print media – the bill is still in draft stage, depositors are not put into any new problem, the sword hanging over the customers in the last 56 years continue to remain the same (please note almost 45 years Congress had ruled the Government in this period, P Chidambaram was also Finance Minister for a substantial period, DMK was part of the Government for nearly 15 years during this period)

Please do not believe the stories that the NPAs or Bad debts of banks like Vijay Mallaya or Sahara will come on the shoulders of depositors. (Never Adani and Ambani had defaulted to any bank and it is not appropriate to drag their names just to defame NaMo) – the position of depositors has not changed at all by this bill, only a good effect can come to the depositors by enhancing the value of insurance protection to a far higher level than the current Rs.1 lakh.

Trust the position is made clear – sorry for a long article, it is need of the hour as many dirty stories are going rounds in social media with a sole intention of defaming NaMo before Gujarat Elections.
 

Aashish

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#7
Is it right time to invest in stocks or mutual funds ? I feel market is already very high at current level and may face a downward correction.

I am not an expert and its my feeling without any substantial information to back it up.
I will explain a part of this and let @Nilgiri explain the rest

In layman terms, Markets run basically on the basket of multiple stock entities making up an index like BSE or Nifty 50. These stocks have percentages based on market capitalisation they command and hence their own price movements tend to add as a weighted movement for the index.

In terms of Index, basically, we arrive at a EPS or Earnings per Share and a multiple called as Price to Earning or P/E.

In general Nifty EPS is estimated at Rs 390.52 for Fy17. The estimates for next Fy is based on various factors including performance of individual constituents of the index

1513357937333.png

FY18 Earnings: A Tale Of Two Halves

Most analysts expect at least an 18% jump in Nifty EPS for Fy18 and 20% for FY19 based on sentiments and scope alone.

What needs to be noted that present level of P/E is as below
1513358076587.png

NSE - National Stock Exchange of India Ltd.

As you can see the present PE is around 26.46 for 10,333.25

The lowest P/E was on 18-Apr-2017 for 23.08 and highest was on 1 Nov for 26.87

Extrapolate it in simple terms and consider EPS to grow just by 10% and you see a Fy18 EPS of 430 rs and a bracket of 9924-11554.

If we consider analyst estimates of Fy18 EPS growth of 18% then EPS Fy18E is Rs 460 approx and a bracket of range is 10616-12360.

But here is a twist
1513359055508.png

Nifty 50 Index (NSEI) - Investing.com

1513360399253.png


The graph above and simple peak and correction shows, we have seen an extended bull run without significant healthy correction.


Thus in spite of any major euphoria Nifty 50 now risks a correction over next few months. (Fibonacci retrenchment before next jump). Also it depends upon the performance of all the major constituents of the Nifty 50 towards the EPS per quarter realisation and net EPS for the year.

Here @Nilgiri comes in as his take on the economy and on the major constituents of the index stocks/companies will indicate the momentum before the correction kicks in for the next run.

A good indicator is how much capex are these major companies looking at for next year and beyond? bcz that will be based on existing cashflow.. cashflow dependent upon company performance, in turn, depending upon demand supply, cost of all types and economics. Are companies still looking at opex optimisation or has started capex expansion? That in turn will showcase raising money and bank financial aspect.. be needing capitalisation and enabling credit for companies.. for that books being cleaned of toxic assets.. all interconnected points..

Thus sentiment of economy, converted into real figures support the indexes movement.. or else its just a bubble ready to burs and a deep correction happens when reality is not proportional to sentiments,

@Nilgiri now I hope I did not disturb your thread too much...
 
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#8
Is it right time to invest in stocks or mutual funds ? I feel market is already very high at current level and may face a downward correction.

I am not an expert and its my feeling without any substantial information to back it up.
Please wait for the some time till this December. If the nifty break 10200 level then it will go down.
 

Shashank

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Please wait for the some time till this December. If the nifty break 10200 level then it will go down.
I
Thanks to home loan for yet to get possession house and kids admission this year I doubt if I will have any money left to invest till next december. One of my colleague was looking for some ideas about it so I thought I will all gurus .
 

dray

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#13
Sir where do you see indian economy by 2030 , could we reach 10 trillion mark by 2030.
I say YES, provided Modi government, or at least a BJP government survives till that time. I will put the economic justification later, I think @Nilgiri would do it better. But 10 trillion is possible considering the very low saturation and depreciated currency, if the policy making is right.
 

Nilgiri

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#14
Is it right time to invest in stocks or mutual funds ? I feel market is already very high at current level and may face a downward correction.

I am not an expert and its my feeling without any substantial information to back it up.
@Aashish post was very spot on. Right now private based GFCF (essentially capex) is lower than before and there will be a few years of lag potentially even as it picks up with NPA resolution over time. This will add to the pressures mentioned, so yes there will be likely corrections across the board if you just want to do general investment like mutual funds or ETFs etc. More specific instruments/mid cap (which are where best returns are), I am somewhat removed from India finance sector on that. Those take more of your time too (good research, time to spend watching and analysis), to grow such portfolio well (again Aashish describes the micromanagement process of those quite well, you will have to do individual research)....and people that do it for you (say various in the know hedge funds etc) will take their premium cut as well. There can be really good returns across even a correction phase if you research the cash flow, stability and outlook and hedge across those specific choices....but probably best to wait for the correction/restructuring phase if you don't have the time to sift through.




@Nilgiri
Good to see you here!

I have been thinking a lot about measures of economy. You know the age old debate on which measure of GDP is better. IMHO, GDP PPP expressed in constant USD or an inflation adjusted currency makes most sense because people produce and consume goods and services and not fiscal instruments. But I have heard a lot of booms and baams from Chinese folks in a forum far far away. I know the usage of these terms is a lot political, but if we are measuring the size of economies and especially with a view point of comparing their relative sizes, which measure of economy is most apt?
PPP by far is the best. Its actually a subject close to my heart. PPP at its core wants to measure realised consumption (be it total or per capita) rather than simply extrapolating the exchange rate of the nominal currency demands (say INR to USD). This is a key difference because if large portion of the economy is simply not exposed (or limited exposure) to the forces that determine exchange rates, it gets undercounted by such extrapolation. As a country gets more and more US (and major foreign liquidity in general) dollars locked up in investments, trade etc, its nominal and PPP metrics will merge over time till there is little difference. But till that happens, PPP is far superior as a measurement. The concerns some Chinese posters keep bringing up about "quality differential" and "limited sampling" are always easily countered if you look at how the ICP has improved its methodology. The concerns of course portend to when the PPP measure first started, but China, India and all other developing countries were still largely isolated and did not have a relatively free capital account etc and adequate level of foreign derived liquidity (investment, trade etc) so the argument does not really matter in that time period either.


@Nilgiri
Can you tell about the FRDI Bill, its advantages or disadvantages and the controversy over it in a short summary. I'm a bit confusing whos word to take on this issue. If possible can you provide some material. Thank you in advance.
I think rain man covered this well in his article. Honestly I have not followed it so much and there is an inclination to over-reaction by cherry picking selectively completely out of context (this is happening with net-neutrality now too).

Honestly there is a massive amount of heritage within India and the world for how govts have basic + leveled insurance protocols on deposits...you have to seriously have sustained intent in destroying the economy and banking system to undo such legislation and volume of precedent in each major economy. Improving/tweaking is like dam maintenance on the reservoir....very different from destroying the dam itself.

Sir where do you see indian economy by 2030 , could we reach 10 trillion mark by 2030.
Yes we can. A quadruple in 13 years time is average (total) growth rate of 11%. Say its 7- 8% of real growth + 3-4% of inflation+appreciation interplay....very doable. It is important to keep reforms sustained. Every reform today has long feedback loop into the future given the velocity of large capital and its ROI...just like every bad/stagnant/corrupt policy is affected by the same thing. This is the reason for example the NPA problem (stemming from the earlier hit taken by Indian finance sector from the global depression in 08/09) lingering and even inflating after this much time. It is why India lost out on at least a trillion to 2 trillion nominal USD dollars (maybe more who knows) for its GDP now....UPA 2 goof ups essentially (both tactically and strategically)...combined with UPA tactics being ok in UPA 1 but strategy (to do much needed reforms when you have inherited and further developed good economic buffer) was not good either.

Can you co-relate disparity in wealth distribution among masses vs PPP of state?
Generally at the stage India is at, the higher any income/consumption metric is (PPP, nominal etc) for a state, the more inequal the state will be.

This is because India is still in the early "unlocking" phase where capital inflow/generation will naturally incline to those in position (through merit and/or inheritance) to gather, accumulate and deploy it (to gain more wealth) relative to those not in such position (again because of demerit and/or non-inheritance)....especially with regards to the highest prime investments/consumptions that form basis of the current economic state of world average.

The inequality will only be mitigated over time when there is enough saturation of such among the "haves" and more "have nots" structurally change into haves (by merit i.e education + savings + good deployment of both for their kids)....so the base can catch up with the peak in relative way. Both of these are nowhere close to happening in India...it is early days.....the high economic growth is really a correction back to an equilibrium (w.r.t world) India proved in its history.

Absolute inequality may continue to increase even then (when structural base speed proves relatively competitive to the speed of the peak) but the point is the socioeconomic goal should be to get that base out of worst forms of poverty....so there is some base equal opportunity. It is sad and disconcerting that India for political optics, is still very attached (and deployed) to idea of "equal results" that marked the thesis for a certain Karl Marx....well past a sensible objective level (the subject known as market failure) anyway.
 
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Pundrick

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#15
@Nilgiri
Can you tell about the FRDI Bill, its advantages or disadvantages and the controversy over it in a short summary. I'm a bit confusing whos word to take on this issue. If possible can you provide some material. Thank you in advance.
Though, Ray has posted an article let me make it short.
1). Our deposited money was never protected, not more than 1 Lakh by DICGC Act.
2). There is a clause in FRDI bill for contract with the creditor/depositor. Means your consent is important before using your money.
3). So govt should have increased the limit of insured deposit to at least 5 lakh, which hasn't been revised since 1993.

And at last, the bill is still with the parliamentary committee, so just chill. There will be extensive discussion in the house which will give us better idea about this development.