Saturday 30 March 2013

Inflation-Indexed Universal Pension - Dumb Idea


Inflation-Indexed Universal Pension - Dumb Idea




Jairam Ramesh advocates inflation-indexed Universal Pension for all - Read on:


At a superficial level, this may sound like a rather appealing idea in a society with zilch social security, especially in a society with a gradual breaking down of the "once-upon-a-time-famous-joint-family-system".

I disagree, and I disagree strongly. Just look under the skin and you'll realise that it is a dumb idea that helps nobody (not even the politicans who may expect to win elections with such an idea). Here are my reasons:

  • First, where's the money? Considering our present fiscal deficit figures, we can't afford to take up an elaborate inflation-indexed universal pension scheme (hereafter referred to as the IIUP in the rest of this blog post). If we launch such an IIUP, we'll directly sow the seeds of hyper inflation
 
  • Do we plan a "tokenist" IIUP - That will be worse than the disease, because an insufficient sum will, on the one hand, be insufficient, and on the other hand, will whet the appetite adequately to provoke other political parties (in a predictably populist fashion) to enhance the IIUP in the guise of making it more meaningful.
 
  • Having an old-age pension for destitutes, physically / mentally challenged individuals, sick persons and the like may be considered, subject to availability of resources. Even here, a voucher system enabling them to obtain essential goods and services would be better than a pension, simply because cash is fungible, and can both be misused (say, for alcohol, for instance) or misappropriated (say, by the local panchayat president, or, more likely, their own kith and kin).
 
  • IIUP will have two critical moral hazards. First, it will make the citizens to lose the urge to plan and save for retirement. Second, it will motivate them to either become lazy or to become spendthrifts during their earning years, knowing fully well that the state would take care of them in their old age.
 
  • Today, it is possible that the number of senior citizens is at a "manageable level". Even this is a moot point. However, in a few decades, the present day baby boomers will grow old, and, like many of the European nations and the US, India too will face a problem of too many old mouths to feed and too few young hands to work. How will the government be able to honour its IIUP commitments then? What's the point in creating an IIUP now and converting the same into a ticking time bomb which will explode in the faces of our future generations?
 
  • Interestingly, it may not even be such a great idea politically - even for the short term. After all, if the Congress Party can promise IIUP, nothing prevents either the BJP or the regional parties to come up with even more fiscally imprudent and outrageous promises. And God forbid, if a party that promises IIUP gets elected, they'll have to face the wrath of the people either way - If they don't implement IIUP, for reneging on their promises. If they don't, for causing hyper-inflation. Both of which will ensure that they lose the confidence of the very same people to win whose votes schemes such as IIUP are thought of in the first place!
 
Hence, it is best if the idea of IIUP is simply dropped - while they still can! If any politican has any doubts, I would suggest that they ask any past or present Petroleum minister as to the problems they face due to subsidies given on Kerosene and LPG cylinders!

Regards,

N




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Wednesday 20 March 2013

Who watches the watchdog?


Who watches the watchdog?




Just read a news item which essentially says:


Den Networks, along with 24 other entities, including its chairman and managing director (CMD), Sameer Manchanda and Raghav Bahl, founder and managing director of Network18, has paid Rs4.93 crore to settle a case of alleged violations with market regulator Securities and Exchange Board of India (SEBI). Thus, it appears that these entities have taken advantage of SEBI’s consent order mechanism by collectively paying a huge fine in order to escape possible punishment, public shame and possible debarment from the securities market.

This is neither the first (nor, unfortunately, the last time) that an organisation is going in for a "settlement" by simplying paying money without admitting or denying guilt.

Interesting observations include:

  • No admission / denial of guilt

  • No declaration as to the specific nature of violations

  • No indication as to the kind of and extent of evidence that was available to prove the alleged violations

  • No publicity in the media

  • Involvement of Rajiv Bahl, Founder & Managing Director of Network 18, which, if I'm not mistaken runs a couple of news channels including a business news channel in the alleged violations (He has also paid some fine for his role in the alleged violations)

  • ALL media houses scream from the roof tops when a politician or a "corporate honcho" indulges in any major or minor financial fraud / scam. And rightly so. But there appears to be an absolute SILENCE when it comes to these kind of matters when their own "brother/sister media persons" are involved.

By now you'll be wondering as to what this post is doing in a financial blog. You would probably think that it belongs to my "Multiple shades of grey" blog. My reasoning is quite simple:

If the media houses are as transparent in their dealings and as "honest & straightforward", you can very well imagine the extent to which you can rely on any information that comes from such media houses.

Please don't get me wrong. I'm not, for a moment, suggesting that one particular media house is not dependable - I'm sure that all of them are entirely capable of "doing such things" - only the degree is likely to vary from one organisation to the other.

On the contrary, what I'm suggesting is that you should be quite wary of anything that you read / hear / watch (including my blog posts). You should take things with a pinch of salt. You should continue to remain cynical. You should watch your steps and watch your back.

Most importantly, before parting with your money in making any investment, you should think a hundred times about what Warren Buffett is known to repeatedly emphasize:

  • Return OF Capital is always more important than Return ON Capital!

Stay wary. Keep reviewing your investments. Stay invested.


Regards,

N



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Wednesday 6 March 2013

Usurers abduct minor girl in pursuit of interest dues


Usurers abduct minor girl in pursuit of interest dues




There has been a great deal of talk about Financial Inclusion. I'd like you to take a look at this news item from the Hindu which truly shocked me:

The gist of the above article:

  • Apparently, a poor guy had taken a loan of Rs. 20,000/= (Rupees twenty thousand only) from a local neighbourhood money lender.

  • And he was paying INTEREST of Rs. 1,000/= (Rupees one thousand only) PER MONTH.

  • And he had been paying this interest for several YEARS.

  • After a few years he was unable to pay a few instalments of interest.

  • And the money lender abducted the borrower's daughter under the understanding that she will be released on repayment of dues!

What is shocking is that the entire article in THE HINDU appears to focus almost exclusively on the fact that the girl has been abducted.

It is indeed not merely shocking but also illegal that the minor girl has been held hostage (even assuming that she has not been ill-treated or assaulted by the money lender).

However, it is extremely important to focus on the root cause:
  • It was not merely poverty that forced the borrower into the clutches of the money lender

  • It was not even the absence of Financial Inclusion (After all, there are enough and more of public sector banks and micro finance institutions which give loans at reasonable rates of interest to poor people)

  • The root cause of the problem is Financial Illiteracy of the poor borrower.

Had the borrower had the most basic of education, especially Financial Education, he would have been able to comprehend the kind of interest rates that he was promising to accept in lieu of a loan of Rs. 20,000/=.

With just a bare minimum of Financial Literacy, he would have known the broad prevailing rates of interest for loans. And he would not have got into this kind of trouble in the first place.

I'm certainly interested in suggestions on how to take Financial Literacy to every corner of the country. Especially to the rural areas.

Perhaps the time has come for EVERY branch of every bank to allocate space, time and manpower to provide Financial Literacy

In case this is too expensive for these bankers, the Government should FORCE them to do the needful through a combination of carrots (Tax deductions could be a good carrot) and sticks (Link the same to Government business - only those banks who oblige will be considered for Government business).

Regards,

N



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Tuesday 5 March 2013

The Malaise of Impulsive Splurging!

The Malaise of Impulsive Splurging!
 

Came across an interesting article:



The above article triggered a few thoughts in my mind, perhaps unrelated thoughts.

Over the past several months, I've been observing a rather significant increase in impulse spending by people at malls, fruit & vegetable shops, neighbourhood grocery stores, book shops, platform shops, restaurants, theatres, etc. And this trend seems to cut across all kinds of people irrespective of their gender, age, religion, financial status, employment status, caste, creed, etc. Only the degree appears to vary based on their financial position.

While an Ambani or Birla scion may buy a nice Maybach car based on impulse, your servant maid may go and splurge on movie tickets for her family costing 25% of her monthly income. And you may be guilty of buying that fancy Samsung Galaxy. Your net-savvy senior citizen dad would have probably been buying a dozen old movies online from the comforts of his home at the same time!

People just go ahead and buy virtually anything that catches their fancy without necessarily bothering about whether they

  • Need that stuff
  • Need the quantum that they are buying
  • Already have it at home
  • Can afford that expense
  • Can postpone the expense by a few days / weeks / months

Believe me. All such expenses being incurred by all and sundry may perhaps be beneficial for stock market investors like me who may own shares of the company whose products and services are being consumed.

However, for the vast majority of the readers of my blog (who belong to the typical middle class), it makes sense to pause, think, and introspect. I'll not go to the extent of your grandma and give you a sermon advising you against splurging money on wasteful items. However, I'll suggest that you spend 3-4 hours in the coming weekend indulging in a potentially interesting exercise:

  • If you're maintaining accounts, try to go through the same and identify all those items of expenses that you consider wasteful or excessive in hindsight. Note them down and add it up at the end.
  • Sit down with your family members and jot down from memory a list of all your entertainment / luxury expenses that you incurred in the past couple of months. This would include stuff like dining out, movies, cricket matches, vacations, etc. Note them down and add it up at the end.
  • Conduct a visual audit of your home by walking around your home and preparing a list of all the "goodies" that you have bought in the last few months. This would include stuff like mobiles, tablets, kitchen equipment, exercise equipment, books, cameras, furniture, works of art, etc. Note them down and add it up at the end.

Now that you've got three lists, calculate the monetary impact of all the above. This will give you an idea of where your money has gone in the past few weeks / months on "discretionary expenses".

Result: You are now financially aware of where your money has gone. Now you are at liberty to sit down with your family members and take a call on which part of your spending can be considered:

  • Essential (and hence unavoidable)
  • Desirable (and hence OK)
  • Wasteful (and hence ought to have been avoided in the first place)

Calculate the monetary impact of the "desirable" and "wasteful" expenses that you have incurred in the past few months.

Identify two alternative ways in which you could have spent the above money in a more effective manner. (For instance, a down payment for a second home or an investment in a mutual fund to be used at the time of retirement or a piece of jewellery for your beloved daughter)

Having done the above, you can perhaps draft an action plan on any corrective steps that you wish to take. If you still feel that you don't wish or need to take any corrective steps, there are only two possibilities that I can think of:

  • You're so rich that you can afford to splurge as you like - please pass on some of your surplus money - I can use it rather effectively!
  • You're so adamant that you have no desire to either learn or change - in which case you would not have read this blog all along. And surely, you wouldn't have reached this sentence - hence this last sentence is obviously redundant.

Regards,

N

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