Your money in the New Year
The year 2017 was marked by four distinct money events. One, it was the year in which systematic investment plans (SIPs) in mutual funds became a household name, leading to a fat pipeline of over Rs5,000 crore a month (that’s Rs60,000 crore a year) flowing from households to equity funds.
Two, 2017 was the year in which investors finally gave up waiting for real estate to recover. Despite the bravado of the builder, broker and banker on the future of real estate, the math just did not add up to support prices that are still very high. Why would you invest in something that yields less than a bank deposit after taxes? Renting clearly was the winner over buying.
Three, gold and bank deposits lost their sheen as prices dipped and rates fell.
Four, risk-averse investors, who feared mutual funds because of their risk, went all out on cryptomoney—not just bitcoin, other cryptocurrencies were also on the investment radar, as were non-regulated initial coin offerings (ICOs).
What lies ahead in 2018 for your money? The answer in one line is: a continuation of the 2017 trends.
To understand why this will happen, we need to understand some macro shifts in the country. India has now moved to a system where the central bank—the Reserve Bank of India (RBI)—targets keeping the rate of inflation between 2% and 6%. RBI cannot achieve this target by itself; the government has to help by keeping the deficit under control. The Financial Responsibility and Budget Management Committee has set the limits of this deficit.
High deficit numbers are bad for us as individuals because these usually translate into high levels of inflation.
High deficit means that either the government is spending too much or the tax revenue is not enough or both. India’s tax-to-GDP ratio is much lower than the emerging-market-economy average.
Few people pay income tax in India and the number of tax-paying crorepatis (rupee millionaires) does not hit six digits. A large government borrowing programme keeps our money ‘repressed’, or earning less than the market rate. Read this piece to understand why we suffer when the government runs a deficit: bit.ly/2mvHBeC.
The core problem then is the lack of taxpayers and the disproportionate burden of tax on a tiny part of the population that does pay taxes. Black money, or income on which taxes are not paid, remains outside the formal financial system and is used to drive up the prices of real estate and gold.
The years 2016 and 2017 saw watershed events that changed the money equation. Demonetisation rammed home the point that the government is serious about its attack on black money. It was a huge political gamble that could have gone either way. The linking of Aadhaar with bank accounts, permanent account number (PAN) and the mobile is taking away the multiple PAN card system used by many to under-report income.
The goods and services tax (GST) will force Indian business to go legit. These are early days of the GST impact, and plenty of operational issues will get ironed out, but the big picture says more tax revenue and less avenues for escape. The government needs to extend the linking of Aadhaar to real estate deals to show its full commitment to fighting black money.
The Real Estate Regulation Act, 2016, is still a road map to the future but the blatant builder-politician-babu nexus in real estate will take a dent. Read this together with the amended Benami Transactions Act, which became active from 1 November 2016, making assets held in the name of another person (driver, cook, maid, cousin, zombie) to avoid taxation, illegal.
All this has just happened in the past two years. But the early effects are visible in asset prices.
Real estate and gold are down, bank deposit rates are down and equity is up. It will take continued political will to keep the anti-corruption machine running; but if it does, expect more of the 2017 trends in 2018. And be sensible about expectations—the stock market does not throw up a 25% return every year. The mantra to money is balance and managing expectations.
How should you think about crypto-money in 2018?
In 2017, we all woke up and realized there is something called a bitcoin, whose price moves every time you shake your head.
If you are asking the question, “Look at the return bitcoin has given, why is it risky?,” then my answer is this: how certain are you that 10 years later, you will still have a positive return from bitcoin? And how certain are you that your diversified equity mutual fund, or your index fund, will give an average annual inflation-plus return number?
Cryptocurrencies as a medium of exchange are here to stay, but what form they finally take and what regulation different governments bring, is yet to be seen.
But cryptocurrencies as investments are very high-risk. I’d stay away. If you don’t buy and sell dollars and euros, why are you buying and selling crypto-money? The greed of winning a bitcoin lottery distracts us from our financial plans. Every few years, a new deal will come that promises huge returns; and by the time we hear of it, the punters have already made their money. Stay with your financial plan in 2018. If you don’t have one, get one. It works.
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