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Paradox of thrift: Why a high savings rate is bad for the economy?

Dr Vikram Venkateswaran — Tue, 07 Feb 2012 05:07:29 +0000

Let me ask you three questions.

Question 1: Do you have high savings?
Question 2: Do you save at the expense of putting off critical purchases?
Question 3: Do you think that is good for the economy?

Well if the answer to the questions is yes, yes and yes, then you might find this piece very interesting.

In the 1940’s John Maynard Keynes pulled the world attention to a theory that had been around since biblical times. The theory states that

“The paradox is, narrowly speaking, that total savings may fall even when individual savings attempt to rise, and, broadly speaking, that increase in savings may be harmful to an economy.”

The first reference to this theory came from the The Fable of the Bees: or, Private Vices, Publick Benefits (1714) by Bernard Mandeville, the title itself hinting at the paradox, and Keynes citing the passage:

As this prudent economy, which some people call Saving, is in private families the most certain method to increase an estate, so some imagine that, whether a country be barren or fruitful, the same method if generally pursued (which they think practicable) will have the same effect upon a whole nation, and that, for example, the English might be much richer than they are, if they would be as frugal as some of their neighbors. This, I think, is an error. (Source: Wikipedia)

Now how is that possible one might wonder? But to Keynesian economists the answer is very simple. In an ideal scenario total income would be equal to total expenses and the savings would match the investments. So in other words total savings would equal investments.

This equation holds everything in balance with all other factors being normal.

Total Income: Total expenses = Total Investments: Total Savings

In other words If the savings is increased then the equilibrium shifts against investments at a lower value, which finally affects the total income leading to a weakening of the economy.

So that is the theoretical logic, let me try to explain with an example.

In the 70’s and 80’s, Japan was at the forefront of world economy winning the war. From electronics to Automobiles the Japanese brands could do no wrong. Soon Japanese brands like Toyota and Sony were household names across the world. Japanese management practices were being copied and there were many best sellers on the rise of Japan. Hollywood also made some very funny anti-Japanese movies.

But then in 1990’s the Japanese juggernaut stalled. Sales and exports declined and Japanese economy went into recession, a recession that lasted almost a decade. The reason for the recession was that Japanese being very cautious on the economy curtailed spending. As the exports were falling, the Japanese consumers increased the saving rate, to brace themselves for the tight days ahead. This led to lesser spending in the local economy and further loss of business for the local Japanese establishments. So now not only the exporters were facing loss of sales but also the local businesses were losing business. This led to further recession something that lasted for more than a decade.

India faced a similar challenge during the peak of the 2008 recession. Luckily for us domestic demand picked up at the right time and bailed India out of the jaws of the recession.

Are savings good? The answer is yes, but as excess of anything is bad, the same holds true for savings.

It is best to view expenditure as investments and invest in local businesses as that would drive the economy and help sustain growth.

How Google earned USD 37.9 Bln in 2011 [Infographic]

Arun Prabhudesai — Wed, 25 Jan 2012 07:56:56 +0000

Google announced its earnings last Thursday, and markets termed it as “disappointing” – Do you know what the disappointing figure was ??

It was whopping USD 37.9 Billion Dollars!

Google has host of different products and services that we use every day including their search, Gmail, Google+, Google Apps and many others. However, Google’s majority of revenue comes from only one source – and that is “Adwords”. The adwords advertising platform alone brought 36.53 Billion USD in 2011, while other revenue amounted for only 1.37 Billion USD.

Check-out full details of Google Earnings Here!

Google Revenue Break-up

While analyzing Google earnings, I came across a wonderful infographic created by Wordstream which beautifully breaks down the Google’s USD 37.9 Billion earnings. It gives you an idea of which Industries advertised the most with Google, and which were some of the most popular key-phrases as well which ones got highest bids.

So how does Google provide all these wonderful free services to us?

It is advertising and advertising alone!!

Vodafone wins $2.5 bln Tax case – Hutchison deal stands ‘bonafide’ !

Viral Dholakia — Fri, 20 Jan 2012 12:50:41 +0000

It was an Indian business valued at $11 billion – and a lawsuit that involved Vodafone Group Plc.’s acquisition of 67% stake in Hutchison Essar from Hutchison Telecommunications International Ltd. that took place in Cayman Islands way back in 2007.

While the Income Tax department claimed taxes on the grounds of the transaction being a transfer of an Indian asset; Vodafone disputed the claim as a deal between two global companies, even if the assets involved in the deal were located in India.

Finally, the curtains are down – Vodafone wins $2.5 billion tax case, as adjudicated by the Supreme Court. The Government of India can no longer tax the capital gains arising from the transaction that took place in Cayman Islands between the two non-resident companies.

In the words of the Supreme Court of India’s Chief Justise S.H. Kapadia:

“The government has no jurisdiction over Vodafone’s purchase of mobile assets in India as the transaction took place in Cayman Islands between HTIL & Vodafone”

Interestingly, after losing the suit in High Court, this multi-billion dollar tax case has unfolded in Vodafone’s favor in the Supreme Court. Apart from being a big thumbs-up for the British telecom giant, the outcome is a moral victory for similar litigations being faced by foreign companies in India such as GE, Cadbury and Vedanta amongst others.

Though, this set back to the I-T department comes as a big knock on the exchequer’s kitty to the tune of Rs.11000 crore on a deal abroad; this landmark judgment will boost people’s confidence in Indian judiciary and promote Indian shores as attractive investment destination, given that tax regulations play a major role in cross border transactions and investments in a country.

It was one of the rare cases where the Indian I-T department went full throttle to lift the corporate veil, issuing a show-cause notice to Vodafone as to why income tax was not deducted at source at the time of purchase of the Indian JV partnership business and paid to the Government of India.

The apex court ruling has now directed the country’s I-T department to return Rs.2500 crore deposited by the telecom giant within two months, along with 4% interest on the said amount; for an offshore transaction that was ‘bonafide’, hence it was non-taxable.

Huge win for Vodafone – Wide repercussions for I-T dept, isn’t it?

5 Indian Banks having their own iPhone/Android Apps!

Kaushambi — Mon, 16 Jan 2012 04:30:24 +0000

Apps of most Indian banks are still in an evolving stage. While some are compatible on Android, many are not yet geared for the iPhone platform and many major nationalized Indian banks still haven’t come out with mobile banking applications at all. Most features offered on apps of Indian banks remain fairly standard. Here’s a quick look at the some of the more popularly used Indian bank apps.

ICICI Bank iMobile

The ICICI Bank app helps its customers make transactions smoothly in any areas related to Savings Account, Credit Cards, Demat account and loan related procedures. Customers can also pay their premiums and utility bills through this iMobile app. From viewing your account balance to making a cheque book request or a funds transfer, this app is your singular junction to fulfill all banking needs. You will now also be able to access your ICICI account through "Your Bank Account" on Facebook very soon!

Download for iPhone / Download for Android

SBI Freedom

Most featured of the SBI freedom app remain standard such as requesting a balance inquiry, transferring funds, viewing a mini statement, getting a mobile recharge, issuing a new cheque book and paying utility bills. The SBI Freedom app also offers customers services to buy rail, air, bus and movie tickets, supported by NGPAY. This service is also currently available on java enabled mobile phones over and other non java phones with a GPRS connection. We think a much better job on the interface is required, as compared to the apps of other Indian banks.

Download for Android

Citibank India

Citibank India’s app comes in a dynamic monotone blue interface and offers services such as locating the nearest ATM, paying utility bills, transferring money, requesting account statements and much more. In 2010, there was a little bit of a panic with the security levels offered on the app in its US version, but otherwise, Indian users have found Citi Mobile’s app to be particularly useful while traveling abroad in comparison to its counterparts.

Download for iPhone / Download for Android

Bank of Baroda M-Connect

BOB’s recent "State-of-the-Art. Straight from the heart" national campaign with its prominent orange brand color has been focusing on building its strength in mobile and web banking. This Android based offers all the standard features related to making transactions, balance enquiries, cheque book issuance, utility bill payments, loan requests, mobile recharge, buying movie and air tickets. A standard yet great way for BOB accounts holders to start dunking their pass books and get mobile.

Download for Android

Standard Chartered Bank India

In the first week of 2012, Standard Chartered jumped on the bandwagon of Indian banks offering mobile banking, but with a twist. The bank’s newly launched app Breeze is one of the few Indian banking apps that will be compatible over 700 handsets, Business Standard reported. Breeze on Android and iPhone offers a reminder facility to keep track of transactions with a calendar view, constantly changing background wallpapers, a facility of logging in with existing user IDs and passwords after registration and personalizing your Breeze in additional to all the standard bank app features.

Download for iPhone / Download for Android

RBI hints at sobering pay packages of foreign bank executives !

Viral Dholakia — Sat, 14 Jan 2012 13:38:42 +0000

The contentious issue of CEO salary and compensation to the senior executives across organizations has often spurred adverse reactions from the general public at large.

A glaring example of this differential approach was witnessed during the 2008-recession; prior to which people wowed every record-breaking salary hike announced for the corporate honchos. However, post-recession, every major CEO salary hike got booed as discriminatory.

Of course, sky-high compensation packages are not always milk washed – while some are, indeed, discretionary in nature, others are truly undeserving; while a lot many are an outcome of supervisory oversight and lack of investor activism.

In latest, the RBI has set guidelines to restrict private sector and foreign banks operating in India by imposing restrictions on bonuses and remuneration packages of chief executives and whole time Directors; in a bid to rationalize salary structures and curb risk-taking in the industry which contributed to the recent global financial crisis.

Stressing on the need of regulatory reform for compensation policy, RBI quipped saying,

“Employees were too often rewarded for increasing the short-term profit without adequate recognition of the risks and long-term consequences that their activities posed to the organizations. These perverse incentives amplified the excessive risk taking that severely threatened the global financial system.”

The sector regulator has further indicated that banks should ensure that the fixed portion of compensation is reasonable, taking into account all relevant factors such as industry practice, types of risk, etc.

Moreover, banks need to strike a balance between fixed pay and variable pay – wherein variable pay should not exceed 70% of the fixed pay in a year. Also, where the variable pay constitutes a lion’s share of the fixed pay, an appropriate portion of the variable pay, say 40% to 60%, must be deferred for over a period.

In addition, the RBI criticized the policy of guaranteed bonuses as inconsistent with risk management and compensation policy. It has also opposed the grant of severance pay other than accrued benefits such as gratuity, pension, etc. in most case scenarios.

At once, some of these RBI guidelines seems quite justified to me – but, hopefully, it does not go over-the-board in an industry which is already tightly regulated by the apex banker.

Banks are already obliged to maintain a fraction of their deposit liabilities in the form of liquid cash with the central bank, popularly known as CRR in financial jargon; and Statutory Liquidity Ratio (SLR) requirements, which is nothing but the amount of liquid assets to demand and time liabilities.

Then again, banks need to keep an eye on the proportion of their loan disbursements to various sectors such real estate, agriculture, manufacturing, etc. based on their risk profiles and priority lending requirements, as laid down by the RBI.

To say the least, there is no dearth of regulations in India on the banking institutions. Of course, India has been praised in the past for its tight regulation and conservative policies in the world of finance. But, we need to ensure that excessive regulation, especially, on the foreign banks does not take the sheen off the sector.

At a time when India is trying hard to woo foreign investments in varied sectors such as retail, aviation, energy, etc. it would be foolhardy to lay harsh regulation and distract attention of overseas inflows. What say?

Would it be wise to place excessive restrictions on pay packages of foreign banks in India?

Pay your Maharashtra Govt dues Online [Duties, taxes, excise, etc]

Viral Dholakia — Wed, 11 Jan 2012 12:56:21 +0000

The Maharashtra government is going full throttle the online way.

While online VAT payment is mandatory since more than a year now, the state government has moved a step forward to ensure that all types of tolls, taxes and statutory fines are paid online to plug loopholes in the system.

In latest, the Government of Maharashtra has launched an electronic portal – Government Receipt Accounting System (GRAS) – to receive online payments in addition to the conventional modes of payment. Thus, government departments offering e-payment facility include Foods and Drugs Administration, Excise, Directorate of Accounts and Treasuries, Transport, etc.

GRAS Challan

Citizens can now pay their taxes online from the selected banks through the internet portal without going through the hassles of meeting government employees personally. What’s more, this is a 24×7 facility available round the clock to the tax-payers.

Furthermore, the GRAS site guides you to a single challan online form that allows you to make instant online payment for your personal taxes as well as behalf of the firm you work for.

In fact, the best part of this online portal is that it allows you to make e-payment even without registration of any kind, based on generation of a key 16-digit government reference number (GRN) to uniquely identify the payment to be made by the user.

16-digit GRN Number Generation

All one needs is an internet connection, minimum knowledge of using browser for e-payment, and, of course, an internet enabled banking account for making online payment. However, the portal also provides facility to make manual payment, either by cheque or cash, at any treasury.

List of Banks in GRAS tie-up for net banking payment:

State Bank of India
State Bank of Hyderabad
Union Bank of India
Punjab National Bank
Bank of Baroda
Bank of India
Indian Overseas Bank
IDBI Bank

Disappointedly, none of the private sector banks have a tie-up with the GRAS portal, which could be a huge road block for the Maharashtra government to promote online payment gateway for collecting tolls and taxes. Hopefully, the state government pulls up its socks to include at least leading private sector banks in the scheme of the things, if not smaller ones.

What say?

India remains most challenging country for Expats!

Arun Prabhudesai — Sat, 07 Jan 2012 10:50:11 +0000

There is no doubt that India is one of the toughest countries to live for expats – and the recently released Expat Explorer survey conducted by HSBC reveals exactly that. Among the 31 countries surveyed, expats have ranked India as the toughest country to live based on their experience of about 30 different parameters. The HSBC survey findings are based on survey of 3,385 expats answering questions on life overseas.

Expats experience in India on various parameters:

India’s best ranking is only a modest 10th on 2 parameters – “Social Life” and “Learning the local language”. The latter is easier because India has plenty of people who speak English, making it easier for expats to learn the local language. Also, unlike most middle east countries, India does not pose too many restrictions on social gatherings, parties and night-life ensuring that India is ranked better on “Social Life” aspect

On the other hand India ranked 25^th or below on 11 parameters – and lowest at 31^st on 2 parameters – Setting up utilities & Fitting in new culture.

I am surprised though with some of the findings of HSBC survey if you see some of the countries at the top of the list of being friendly with expats (Expat Experience parameter). Thailand comes at number 1 position followed by Canada and South Africa.

List of Top 10 countries for expat friendliness

The above chart is for expat experience in foreign country alone and I am surprised that United states ranks a lowly 10^th while Thailand is ranked the highest on expat experience. It is also interesting to note, that most of the countries in top 10 are smaller developing nations. The worst countries on friendliness apart from India (31^st) are Russia (30^th), United Kingdom (29^th), China (28^th) and Qatar (27^th).

If you consider things like Income, house, Cars, holidays, domestic help etc, which are segregated under “economies” in the survey, India does rank a modest 16th, just behind United States. The Best country for expats from “Economies” perspective is Saudi Arabia, while the worst country is Italy!

You can check out the entire Expat Explorer survey here!

Savings Bank Account Number Portability coming soon !

Viral Dholakia — Wed, 04 Jan 2012 13:12:11 +0000

Implementing portability scheme is any form of service is the best way to ensure that the customer remains the king. While mobile number portability empowered telecom subscribers to ditch their erring operators; health insurance portability allowed customers to switch between, their life and non-life insurance, service providers.

More than serving its cause of allowing customers to switch between agencies, MNP has succeeded in creating policy awareness amongst them, and fear within service providers that they are not the dictators of the trade.

Furthermore, the government may now introduce portability in the banking space too. Yes, we may soon be allowed to move our savings bank accounts from one bank to another with the same number, which is likely to force banks (especially PSU banks) to improve their service levels.

Financial services secretary D K Mittal was quoted as, “We want to do it (savings account number portability). Right now there are some technical problems, we have identified them. We will overcome them soon.”

Moreover, this move comes at an opportune time when the RBI has deregulated the savings bank deposit rates. Post-deregulation, while smaller lenders led by Yes Bank has raised the savings deposit rates to 7%; leading banks such as HDFC Bank and SBI have shown muted response in terms of passing on hikes for their savings deposits.

Thus, once porting is allowed in the banking industry, the equation for larger banks could turn overhead – as the rate differential is too high to ignore between smaller and bigger banks, at this juncture. Take, for instance, for SBI – a 50 bps increase in the in the savings bank deposit rate will push up the state-owned bank’s costs by Rs.1500 crore.

The regulation is likely to be implemented once banks sort out their customer KYC norms, core banking solutions and other issues such as renumbering of savings accounts, most of which are preceded by branch codes of respective banks, and upgraded technology ready to adopt number portability.

This prospective norm will certainly save a lot of paper work involved in switching your bank account; and best of all you could retain your old account number without much hassles. Lastly, we need a centralised agency that would maintain all our KYC documents, so that we don’t need to comply with submissions with different banks repeatedly.

What say?

Foreign Investors allowed to directly invest in Indian Equity Markets!

Arun Prabhudesai — Mon, 02 Jan 2012 09:11:29 +0000

2011 was not a very Happy year for investors in Indian Stock Markets – Indian as well as international investors lost money to the tune of lakh’s of crore rupees. Benchmark Index lost over 20% from the start of the year.

This year though, Government is taking steps to turn around – The new year has started on a happy note for Indian Stock Markets with Central Government allowing Qualified Foreign Investors (QFIs) to directly invest in Indian equity market. This will help Indian stock markets to widen the class of investors, attract more foreign funds, and reduce market volatility.

It is a great sign that Government is bringing in reforms to open up Indian capital markets – Till now, Foreign Institutional Investors (FII’s) were only allowed to invest in mutual funds . Though, this is a significant news, somehow investors don’t seem to have taken it in a very positive way – At the point of writing this, Sensex as well as Nifty are both trading marginally in red.

Here are salient features of the new Scheme:

RBI would grant general permission to Qualified Foreign Investors (QFIs) for investment under Portfolio Investment Scheme (PIS) route similar to FIIs.
The individual investment limit for QFIs shall be 5% and 10% respectively of the paid up capital of Indian company. These limits shall be over and above the FII and NRI investment ceilings prescribed under the PIS route for foreign investment in India.
QFIs will be allowed to invest only through SEBI registered Qualified Depository Participant (DP). A QFI can open only one demat account and a trading account with any of the qualified DP.
DP shall ensure that QFIs meet all KYC (Know your Customer) and other regulatory requirements, as per the relevant regulations issued by SEBI from time to time. QFIs shall remit money through normal banking channel in any permitted currency (freely convertible) directly to the single rupee pool bank account of the DP maintained with a designated AD category – I bank. Upon receipt of instructions from QFI, DP shall carry out the transactions (purchase/sale of equity).
DP shall be responsible for deduction of applicable tax at source out of the redemption proceeds before making redemption payments to QFIs.

With most of the stock Analysts and experts being under-weight on Indian equities currently, we may not see much participation from QFI’s. However, when the tide turns, I am sure this new reform will help bring more money into Indian capital markets.

Would love to hear your views on this.

[Suggested Reading - Dear FM, are reforms only for foreigners or Indians, too? by R. Jagannathan]