For every rupee sold by Indians, foreigners have invested Rs 6.2 in the stock market

indian rupees Vivek Kaul 
The BSE Sensex has been flirting with new highs these days. It touched an intra-day high of 22,030.72 on March 18, 2014. The Sensex had touched similar high levels in January 2008, more than six years back. It is interesting see how the Indian investors and foreign investors have behaved since then.
The foreign institutional investors (FIIs) have bought stocks worth Rs 1,56,517.42 crore between January 2008 and March 14, 2014. During the same period the domestic institutional investors have sold stocks worth Rs 25,184.3 crore. Given this, for every rupee worth of stocks sold by the Indian institutional investors, the foreigners have invested Rs 6.21 (Rs 1,56,517.42 crore divided by Rs 25,184.3 crore) in the Indian stock market.
Why has that been the case? There are number of reasons for the same. The investment bank Lehman Brothers went bankrupt in September 2008. This unleashed the current financial crisis. In order to tackle this crisis, the Western nations have run an easy money policy, which includes maintaining low interest rates as well as printing money, in order to get their economic growth going. The idea being that people will borrow and spend money at low interest rates, which will benefit businesses and in turn lead to economic growth.
The easy money policy has allowed the big institutional investors to borrow money at very low interest rates and invest it in financial markets all over the world. That is the major reason behind foreign investors investing Rs 1,56,517.42 crore since January 2008, in the Indian stock market.
In fact, things get even more interesting if we consider data from December 2008 onwards, given that the western nations started to run an easy money policy towards the end of 2008. Since December 2008, the foreign investors have invested Rs 2,59,354.8 crore in the Indian stock market. During the same period the domestic investors have sold stocks worth Rs 96,244.8 crore.
What explains this contrast? The easy money policies explain one part of the argument, they clearly do not explain why Indian domestic investors have stayed away from the stock market. Lets look at some data that might throw up some clarity.
Data provided by the Association of Mutual Funds in India(Amfi) shows that in January 2008, around Rs 1,72,885 crore was invested in equity mutual fund schemes. It is important to understand here that the money was invested in equity mutual fund schemes and not necessarily stocks. A mutual fund scheme that invests more than 65% of the money that it manages in stocks is categorised as an equity mutual fund scheme. Money invested in equity mutual fund schemes formed around 32% of the total money managed by mutual funds at that point of time.
In February 2014, the amount invested in equity mutual fund schemes stood at Rs 1,57,227 crore. Money invested in equity mutual fund schemes formed only around 17% of the total money managed by the mutual funds.
In January 2008, the amount of money managed by mutual funds stood at Rs 5,48,064 crore. This has since then gone up to Rs 9,16,393 crore. Hence, mutual funds are clearly managing more money than they were a little over six years back, but the amount of money they manage under equity schemes has clearly come down.
Since August 2009, the Securities and Exchange Board of India (Sebi) made it mandatory for mutual funds not to charge any entry load on mutual fund schemes. Prior to this, out of every Rs 100 put in by an investor in any equity mutual fund scheme, Rs 2.25 used to be charged as an entry load and passed onto the agent as a commission.
With almost no commissions on offer, agents stopped selling equity mutual fund schemes to retail investors. Hence, the amount of new money coming into the equity mutual funds and through them to the stock market has come down dramatically. What has also not helped is the fact that investors have redeemed their investments in equity mutual fund schemes big time since January 2008.
Investor interest has also gone away from unit linked investment plans (Ulips) offered by insurance companies. Ulips are essentially investment cum insurance plans which offer the investor an indirect option of buying stocks among other things.
In the bull market that ran from 2004 to 2008, banks and insurance agents mis-sold Ulips big time given the high commissions on offer and in a large number of cases promised to double the money invested in three years. By now a large number of Ulip investors have figured out that the only person who gained in case of Ulips was the insurance agent. Hence, investors have stayed away from investing in Ulips and through them into the stock market.
Given this, unlike the foreign investors, the Indian institutional investors have found it difficult to raise money to invest in the stock market over the last six years. And that explains to a large extent the fact that foreign investors have invested a lot of money in the stock market, whereas the Indian investors have stayed away.
The article originally appeared on on March 19, 2014

(Vivek Kaul is a writer. He tweets @kaul_vivek) 

UPA destroyed economy. Where will Modi get the money to sort out this financial mess?

narendra_modiVivek Kaul 
The Congress led United Progressive Alliance (UPA) seems to have more or less realized that the 2014 Lok Sabha elections is a lost cause. Hence, the idea seems to be make things difficult for the next government, especially on the finance front.
I had written on this issue on February 17, 2014, the day the finance minister P Chidambaram presented the interim budget. Since then, more details have come out, and these details clearly suggest that things are much worse on the finance front than they first seemed.
A recent news report in the Daily News and Analysis points out that the central government owes the states Rs 50,000 crore on account of compensation for the central sales tax. The newspaper quotes a finance ministry official to point out that a 2% cut in the central sales tax was introduced as a part of the process to phase it out and move towards goods and services tax. The state governments were to be compensated for the losses they had incurred because of this. This payment hasn’t been made for the last three years and the amount has now gone up to close to Rs 50,000 crore.
This is something that the next government will have to deal with. On February 28, 2014, the government raised the dearness allowance of five million central government employees to 100% of their basic salary. This was earlier at 90%. 
This move is expected to cost around Rs 6,390 crore in 2014-2015. Interestingly, the government had hiked the dearness allowance from 80% to 90% of basic only in September 2013, with effect from July 2013.
The government also approved among the terms of reference for the seventh pay commission, the addition of 50% dearness allowance with the basic pay. This is expected to push salaries of public sector employees up by 30%, that is, if the recommendations of the seventh pay commission are implemented in the time to come. Also, once the dearness allowance of the central government employees is increased, it puts an immense amount of pressure on state governments to increase the salaries of their employees as well.
There are some points from the interim budget that need to be highlighted as well. An amount of Rs 1,15,000 crore has been budgeted against food subsidies for 2014-2015(the period between April 1, 2014 and March 31, 2015). Out of this around Rs 88,500 crore has been allocated under the Food Security Act.
The problem with this number is that the food security scheme is expected to cost much more than the amount that has been allocated. (
you can read a detailed explanation here). Also, with Rs 88,500 crore allocated towards food security scheme, it doesn’t leave enough, for the public distribution system that is already in place. As the DNA article cited earlier points out “The next government will have to find a lot of resources for the public distribution subsidy as well. Out of the total Rs 115,000 crore for the food subsidy, the government has allocated Rs 88,500 crore to the Food Security Act.”
And if all this wasn’t enough there are expenditures from the current year that haven’t been accounted for and will spill over to the next year. Estimates suggest that this year close to Rs 1,23,000 crore of subsidies have been postponed to the next year. The next finance minister would have to meet this expenditure.
In fact, in a last ditch effort the government tried to push in nine ordinances before the election commission announced the elections dates. But the President Pranab Mukherjee did not agree to it. As economist Arvind Panagariya 
points out in a recent column in The Times of India “Perhaps the worst poison pill is UPA’s attempt to push as many as nine ordinances and clear vast numbers of projects on literally the last possible day before Election Commission’s Model Code of Conduct was expected to kick in. Only sage advice from the president held back the government’s hand from pushing the vast majority of these ordinances.”
The Congress led UPA government has left the country in a huge financial mess and the next government will have a tough time dealing with it, from day one. And if they mess it up even slightly, India will end up in an even bigger mess than it currently is.
The opinion polls suggest that Narendra Modi is likely to be the next Prime Minister of India. The great Indian middle class has high hopes from Modi and his ability to get the Indian economy back on track. But the question is where will Modi get the money from, for whatever he wants to do, to set the economy back on track? Close to Rs 2,00,000 crore of government expenditure next year, hasn’t been accounted for.
One way out is to cut down on the subsidies. But will Modi be able to do that, given that he is likely to lead a coalition government. Also, during all the years that the BJP has been in opposition it has supported the populist entitlement programmes, which have led to the government expenditure going up big time. So it is really not in a position to reverse that expenditure even if it is voted to power.
As Robert Prior-Wandesforde, an economist at Credit Suisse in Singapore, recently told Mint “The power of the finance minister in the new government will be key… as will be the administration’s ability to either cut spending on social welfare or match that expenditure through revenue.”
Now that, as the common phrase goes, is easier said than done.
The article originally appeared on on March 13, 2014

 (Vivek Kaul is a writer. He tweets @kaul_vivek) 

Demand collapse: What does the story of the one handed economist tell us about the Indian economy

harry trumanVivek Kaul
The story goes that Harry S Truman, the president of the United States between April 1945 and January 1953 once asked for “a one handed economist”. “All my economists say, ‘on the one hand…on the other,” he bitterly complained.
The question is why do economists do that? Why do they have a tendency to argue both ways? Why can’t they be more clear about things? One reason for this is the fact that different economic data often point in different directions, and this produces many “on the other hand” kind of economists.
Very rarely, does different economic data point in the same direction. And that is happening in the Indian case right now. Different economic data are all clearly showing that there has been a collapse in consumer demand.
Let’s start with the trade deficit for February 2014, which was declared on March 11, 2014. Trade deficit is the difference between imports and exports. The trade deficit fell by 42.1% to $8.1 billion. This fall was primarily on account of imports coming down by at 17.1% to $33.82 billion.
Imports fell because of a 24.5% fall in non oil imports to $20.1 billion. Non oil imports were at $26.7 billion in February 2013. This means a fall of $6.6 billion. One reason for the fall in non oil imports was the fall in gold imports. Gold imports in February 2013 were at $5.24 billion. This year they fell to $1.63 billion, a difference of $3.61 billion.
As mentioned earlier total non oil imports fell by $6.6 billion during February 2014. What this clearly tells us is that fall in non oil imports is not just because of a fall in gold imports. A major part of the fall is clearly because of a lack of consumer demand for imported goods.
Now let’s look at the index of industrial production(IIP) for January 2014. The IIP is a measure of the industrial activity in the country. This data was declared on March 12, 2014. The overall index grew by just 0.1% during January 2014. While this is an improvement over the last few months, it is nothing worth getting excited about.
Manufacturing which forms a little over 75% of the index fell by 0.7% during January 2014, in comparison to January 2013. This primarily is on account of the slowdown in consumer demand. When consumers are going slow on purchasing goods, it makes no sense for businesses to manufacture them. When we look at the IIP from the use based point of view it tells us that consumer durables (
fridges, ACs, televisions,computers, cars etc) are down by 8.3% in comparison to January 2013. The overall consumer goods sector is down by 0.6%. The lack of demand also means that the investment climate for businesses is not really great. This is reflected in the lack of capital goods growth, which was down by 4.2% during January 2014.
This slowdown in consumer demand was also reflected in the gross domestic product(GDP) numbers declared around two weeks back. If we look at the GDP from the expenditure point of view, the personal final consumption expenditure(PFCE) for the period October to December 2013, formed 61.5% of the total expenditure during the period. In September to December 2012, the PFCE had formed around 62.7% of the total expenditure.
What this clearly tells us is that PFCE is not rising as fast as other expenditure. In fact, during the period, the PFCE rose by just 2.6% to Rs 9,81,463 crore in comparison to September to December 2012.
Interestingly, during the period September to December 2012, the PFCE had grown by 5.1%. What this clearly tells us is that people are going slow on personal expenditure. The reason for that is high inflation which has led to more and more money being spent on meeting daily expenditure. Retail inflation in general and food inflation in particular has been greater than 10% over the last few years, and has only recently started to come down. Hence, people are postponing all other expenditure and that has had an impact on economic growth. One man’s expenditure is another man’s income, after all.
So where does that leave inflation? The consumer price inflation for February 2014 came in at 8.1%. It was at 8.79% in January 2014.
A major reason for the fall has been a fall in food prices. Food prices in February 2014 rose by 8.57% in comparison to last year. This, after constantly showing a double digit growth for a long time. Interestingly, food prices fell between January and February 2014. The question is will food prices continue to fall after falling for three straight months? The answer is no. Unseasonal rains and hailstorms in parts of the country have damaged crops, and this is likely to push up prices again.
Food prices form close to 50% of the consumer price index, which is one of the measures of inflation. Also, food forms nearly half of the expenditure of the average Indian household. Hence, for any pick up in consumer demand to happen, food prices need to continue to stay reasonable.
Further, non fuel-non food inflation, or what economists refer to as core inflation, fell by around 20 basis points (one basis point is one hundredth of a percentage) to 7.9%. This has been proving to be a tough nut to crack. Non fuel-non food inflation takes into account housing, medical care, education, transportation, recreation etc. If consumer demand has to be revived it is important that core inflation continues to fall, over a period of time. Along with this food prices need to continue to fall as well.
If that happens, then some consumer demand is likely to come back.

The article originally appeared on on Marcy 13, 2014
 (Vivek Kaul is a writer. He tweets @kaul_vivek) 

Why flying remains the safest form of travelling despite crashes

cartoon-airplaneVivek Kaul  
The Malaysia Airlines Flight 370 disappeared on March 8, 2014, with 227 passengers and 12 crew members, around 40 minutes after taking off. Whenever there is an air crash, questions are raised on how safe it is to fly. Given this, it is not surprising that the same seems to be happening at this point of time, with the disappearance of Malaysia Airlines Flight 370, which was on its way from Kuala Lumpur to Beijing.
“It increases the fear for people who are already afraid of flying. It temporarily makes people who may not be phobic about flying uneasy about flying. And people who already really have difficulty flying — it stops them from flying for a while,”
 Martin Seif, a clinical psychologist, told
Let’s take the case of what happened in the United States in the aftermath of two aeroplanes colliding into the two towers of the World Trade Centre on September 11, 2001. Many Americans took to driving long distances instead of flying.
But was that the right thing to do? As Spyros Makridakis, Robin Hograth and Anil Gaba write in 
Dance with Chance – Making Your Luck Work for You “In 2001, there were 483 deaths among commercial airline passengers in the USA, about half of them on 9/11. Interestingly in 2002, there wasn’t a single one. And in 2003 and 2004 there were only nineteen and eleven fatalities respectively. This means that during these three years, a total of thirty airline passengers in America were killed in accidents. In the same period, however, 128,525 people died in US car accidents.” The authors point out that close to 1600 deaths could have been avoided if people had flown instead of deciding to drive.
So, why did so many people take to driving in the aftermath of 9/11? The answer lies in what psychologists call “the illusion of control”. As the authors point out “The simple explanation is that, behind the wheel of your own automobile, it is natural to feel in control. Try telling drivers that they have no influence over the skills of other road users, the weather, the condition of the road, mechanical problems, or any other common causes of accidents – they will agree. But they still 
feel in control of their destiny when they drive. They can’t help it. Put them on a plane, and they think their life is in the hands of the airline pilot or, worse, a bunch of terrorists.” In fact, in the case of the disappearance of Malaysia Airlines Flight 370, pilot suicide is also one of the theories being bandied around and that definitely adds to the illusion of control.
The media plays a huge part in magnifying the illusion of control. “Plane crashes are turned into video images of twisted wreckage and dead bodies, then beamed into every home on television screens,” write the authors. The images of the crash lead people to conclude that flying is risky. In case of Malaysia Airlines Flight 370 there have been no images of the wreck till now, but there has been constant news coverage all over the world.
What people don’t take into account is the fact that many airplanes make safe landing almost every minute. None of this makes for news, though. “The thousands of airplanes which arrive safely at their destination every day hold no media interest. This isn’t news. So even the most logical of us are led to believe that the chance of a passenger dying in an airplane accident is much, much higher than it really is,” write the authors.
Also, car crashes rarely get talked about. “Car crashes, on the other hand, rarely make the headlines…Smaller-scale road accidents occur in large numbers with horrifying regularity, killing hundreds and thousands of people each year worldwide…We just don’t hear about them.”
What psychologists call the “availability heuristic” is also at work here. Daniel Kahneman defines the availability heuristic in 
Thinking, Fast and Slow as “We defined the availability heuristic as the process of judging frequency by “the ease with which instances come to mind.””
And given that more air crashes make it to the news than car accidents, it is easier to recall air crashes and deem air travel to be riskier. But driving remains much more risky than flying. As Kahneman puts it “Even in countries that have been targets of intensive terror campaigns, such as Israel, the weekly number of casualties almost never came close to the number of traffic deaths.”
In fact, flying has become more safe over the years.
 Data suggests that fatal accidents on commercial airplanes happened once in every 140 million miles flown. Now the number stands at once for every 1.4 billion miles flown.
Also, there have been improvements on other fronts as well. 
As Christian Wolmar points out in The Guardian “While extremes of weather and bird strikes continue to pose a risk, modern planes are far more resilient than in the past. Hijacking, a cause of several accidents in the 1970s and 1980s – and of course 9/11 – has been made very difficult thanks to the security passengers have to go through to get on a plane.”
Given these reasons, air travel remains the safest form of travelling, notwithstanding the air crashes that happen now and then.
The article originally appeared on on March 11, 2014

 (Vivek Kaul is a writer. He tweets @kaul_vivek) 

Sensex hits 22,000: Why you should drink the stock market SIP by SIP

indian rupeesVivek Kaul  
One of the investment lessons that gets bandied around when it comes to investing in the stock market is that stocks are for the long run. Of course, no one really gets around to tell you how long is the long run.
The BSE Sensex touched an all time high level of 21,919.79 points on March 7, 2014. As I write this it is at 21,942.11 points, which is higher than the all time high it touched on March 7. During the course of trading today (i.e. March 10, 2014), it even crossed 22,000 points briefly.
The question is what are the returns that the Sensex has generated. Between January 2, 2008 and March 7, 2014, the Sensex has given an absolute return of just 7.11%. Yes, just 7.10%, over a period greater than six years.
You, dear investor, would earned significantly better returns by just letting your money lie idle in a savings bank account which pays an interest of 4% per annum (or actually 2.8% if you come in the 30% tax bracket). If you had made the effort to move your money into a bank, like Yes Bank, which pays up to 7% interest on the money deposited in a savings bank account, you would have done even better. And these returns would have been guaranteed, unlike the returns from a stock market. So much for stocks being the right investment product for the long run.
The BSE Sensex is made up for 30 stocks listed on the Bombay Stock Exchange. And in the last six years the stocks that constitute the index have been changed majorly. 
Dhirendra Kumar of Value Research points out in a column that “ The Sensex has seen large changes since that time. Nine of the thirty companies have been replaced. It’s literally not the same Sensex any more.” And if one were to re-calculate the value of the Sensex assuming these stocks would have continued to be a part of the Sensex, the Sensex would have actually been at 20,400 points today, writes Kumar. This is close to around 6% lower than the March 7 high that the Sensex achieved. Also, this is not totally accurate given that one of the companies Satyam Computers, no longer exists.
So a buy and hold strategy on the Sensex does not really work. But does that mean you should not invest in the stock market? Should you stay away? Not at all.
The best way to invest in the stock market continues to be a systematic investment plan(SIP). If you would have started an SIP on the HDFC Equity Fund in January 2008 (which was one of the better funds back then) it would have given you a return of 12.96% per year, assuming had continued your SIP till date through the ups and downs of the stock market.
You would have done even better if you had started an SIP and invested regularly in ICICI Prudential Dynamic Fund. The returns in this case would have amounted to 14.43% per year. An SIP on DSP Black Rock Top 100 fund (which was also one of the better funds back then) would have earned you a return 9.54% per year, whichi is not as high as HDFC Equity Fund or ICICI Prudential Dynamic Fund, but not bad nonetheless.
Also, it is worth remembering that these returns are tax free. Any mode of investment giving a tax free return of 9% or higher, in these difficult times, is a pretty good bet.
Of course, most people would have missed out on these returns, given that they would have started to cancel their SIPs once the stock market started to fall in 2008, in the aftermath of the financial crisis. But what they forgot is the basic principle behind an SIP.
For SIPs to give good returns, the stock market needs to move both up and down. When the stock market goes down, then investors are able to buy a greater number of mutual fund units for the same amount of money. And these units bought when the markets are low, provide the kicker to the overall returns once the stock market rallies.
When it comes to mutual fund SIPs, it is best to remember the old Hero Honda advertisement. Fill it, shut it, forget it. 

Discloure: Vivek Kaul is a writer. He tweets @kaul_vivek. He invested in all the mutual funds mentioned in the piece, through the SIP route, at some point of time.
The article originally appeared on on March 11, 2014