Indranil Bhoumik/Mint
Indranil Bhoumik/Mint

How to restructure your personal finances

An unintended advantage of the cashless economy is that now each of us will have access to our own expense data

Before the news cycle could be dominated by perhaps the most controversial election result in the free world, our own Prime Minister announced that 80% of India’s cash circulation would become worthless in a few hours. While the debates rage on about both these events in our world, it would be prudent to take a deep breath and understand what it means to our personal finances. Should I liquidate all my stocks? Should I sell my property? Should I invest in gold? Let us try to answer these questions.

First and foremost, a move towards a cashless economy is inevitable. For those of us who were used to paying most of our monthly bills online, it would be great if we could bring our maid, cook, driver, newspaperwallah and our milkman into the ambit of digital banking. With every bank and financial institution pushing its e-wallet and app linked to the United Payment System (UPI), it is but a matter of time when cash required per family would be minuscule. For those of us who haven’t yet embraced technology, now is perhaps the best time.

An unintended advantage of the cashless economy is that now each of us will have access to our own expense data. With the help of aggregators, we can track every paisa spent through each of our debit cards, credit cards and our e-wallets, all in one place. Demonetisation has taught us to conserve precious cash, which is to be spent on absolute essentials only. With access to our expenses and automated budget tracking, we can extend this great habit and control our expenses.

The other event that will have a bearing on Indian investors is the election of Donald Trump.

Time to recalibrate

Trump has been a proponent of America-first, is against the Trans-Pacific Partnership treaty, and is less open to the globalisation mindset. The yield on the US 10-year bond has increased by 50 basis points (bps) since November, and US dollar is at its strongest in the past 13 years. However, we expect to see volatility in the short term.

In the geopolitical sense, Trump has made his anti-China stance clear. With A favourable attitude towards India, we could look at US-India relations with cautious optimism.

Regardless, India still remains an attractive foreign direct investment (FDI) destination, with a low current account deficit. Therefore, India seems to be in a strong position to weather any short-term volatility resulting from any unforeseen economic measures by the US.

But if Trump’s anti-globalisation rhetoric turns into action, it could create a huge negative but short-term impact on automobiles, manufacturing and software industries in India, before the impact in terms of rising prices are felt in the US and ultimately the free market rationale takes over.

On the domestic front, what could be the impact of demonetisation? Consumption makes up for 56 % of India’s gross domestic product (GDP). Demonetisation has brought down consumption across all sectors and, therefore, an impact on GDP is unavoidable.

Growth in cash-intensive sectors such as real estate, construction and fast moving consumer goods (FMCG) are likely to take a hit in the short term as consumers are deferring purchases. But over the medium term, there would be benefits through higher government spending and greater financial inclusion. Also, the movement of household savings from physical to financial sectors will help boost growth.

In the long run, getting money into the ‘white’ economy leads to better tax collection leading to capital formation and lower deficits, thus paving the way for strong economic growth. Hence, this is a good option for the long-term, patient investors to build equity portfolio for wealth creation. Also, in the short run, the interest rates are likely to come down with huge deposits in banking system so duration funds will be a good option for the medium term.

Further, it would become more difficult for non-income tax paying, cash-based businesses to survive. These will end up bringing in a huge chunk of tax and, more importantly, boost recorded consumption. The organised sector will reap the benefits of lower cost of capital and higher market share. Thus, those of us who have been buying through the organised sector for years can expect goods to become cheaper.

Not only that, as more money moves from traditional black money preserves such as gold and real estate to mainstream financial investments, the cost of lending will reduce, which means you would probably be able to get a personal loan or a home loan at cheaper rates.

In this scenario, watch your personal finances:

Expenses: All the goods or services that were previously provided without tax will now become dearer with the addition of taxes. But for those who were participating in the organised economy, the impact on prices will be negligible if not positive. To boost a ‘whiter’ economy, there are strong indications that there might be a positive overhaul of personal taxation regime, which might allow us to take more of our salaries home.

Mutual funds and stocks: Make sure that exposure to real estate, jewellery, FMCG and other cash-based industries is reduced. Software companies in India will also bear the brunt of Trump’s ‘anti-outsourcing’ rhetoric, at least in the short term. With Trump’s focus on improving infrastructure, the metals index will hold its ground. At the same time, increase exposure to the financial services sector, for which this is a windfall. Both the demonetisation as well as the Trump presidency look positive for India in the long term, and therefore there will be considerable market support to investment in these asset classes.

Real estate: While there will be a fall in the cash dependent secondary and land market, it might be a boon for actual investors with white money. There might be negligible impact on primary sales in new projects from well-known developers that do their business in white. Some correction in home loan rates is also expected, so it would be most prudent to wait for the same.

Gold: In times of uncertainty, the yellow metal usually sees a rise. This might be the asset class of choice, if Trump’s rhetoric turns into action. But chances are that with the clamp-down on gold bought with black money, the yellow metal will see a decline in demand. It would be best to hold on to it.

Fixed deposits and bonds: As banks become flush with liquidity and as the central bank tries to flush liquidity out of the system through increased cash reserve ratio (CRR), it is only a matter of time before deposit and bond rates fall. This will, in turn, push more money into longer-term, market-linked instruments.

Cash: It would be prudent to maintain an emergency fund in one’s bank account for easy withdrawal (after the relaxation of withdrawal limits). In case extra protection through liquidity is desired, liquid funds or sweep-in accounts should be maintained.

Rahul Parikh-Head, Aditya Birla Money MyUniverse

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