On Stress, Control, and the role Dogs play

stress 2

Everyone seems constantly stressed out. Stress triggers are omnipresent and each spark can trigger a cascade – a bad boss, traffic jams, the weather, kids, parents, studies, work….basically everything that makes up routine modern life as we know it.

There is nothing modern about stress though, which is as old as humanity itself. Fact is, we have not changed much physiologically in the past 50 odd thousand years. Most of this time is represented by life as hunter gatherers, a small fraction as agriculturists, and a minuscule portion as post-Industrial Revolution workers that we see ourselves as today. All of the physiological responses to stress – like change in heart rate, blood pressure, etc. – are tied to our fight or flight response. Hence, we retain the same response mechanism that was designed for our two primary purposes: survival and reproduction.

In most cases, modern life does not have predators or pose threats of starvation. Yet, our age old instincts get triggered each time a challenge, an unpleasant experience, or a perceived threat appears. One would think that if our bodies have evolved to respond to these triggers then the response shouldn’t be something to worry about, right? Not exactly if the triggers are as constant as we find them. 12 hour work days with demanding (demonic!) bosses and competitive co-workers, capped by battling peak hour traffic to get home to uncompleted chores, demanding family members, and unbalanced finances, doesn’t sound like the typical hunter-gatherer’s day. So the point is the constancy of the triggers and what it does to us. If every day and every moment is an emergency, what kind of havoc is being wrecked on our body?


Also, we tend to focus on the physiological effects of stress. What gets overlooked is how constancy of stress, and the instinctive, intuition based, short-term thinking it encourages, changes our response mechanism – we end up using this reactive mindset even in situations where careful, systematic, and deeper thinking is required like in relationships, investing, and career choices.

While there are many theories about stress triggers, I do believe that lack of control is a common link, and this is what got me thinking about the (definitively proven!) stress-busting abilities of dogs.


How do dogs reduce stress? Companionship, the fuzzy feeling when we rub their coats, the exercise we get thanks to them, the feeling of being a caregiver, the 10,000 year old domestication history everyone talks about that makes it natural….all fair points. But could a sense of control be one of the strongest factors? Look at it this way: we feel a sense of control in having a well-trained and well-adjusted dog. From the dog’s perspective, (s)he is well-adjusted because you have been accepted as not just an owner, but a guide and leader, or the so-called ‘Alpha’. In a life that throws uncontrollable challenges at us constantly, here is a relationship where you finally feel in control. It is not the leash, the chain, the cage, or the prod that is in control, but you.

In some sense, despite being the Alpha, it is an honest, 2-way relationship where you need your dog as much as (s)he needs you, perhaps more than you know. Your time, patience, love, attention, and devotion will be paid back at rates of return any fund manager would envy.

Lessons from Graham: 3 ways you can ‘mar’ your investment returns


Benjamin Graham, the original Value Investor, is widely regarded as the Dean of Wall Street and not without reason. His fundamental lessons drawn from the early part of the 20th Century remain timeless.

Here is a humble attempt to distill his advice into three fundamental points. There is obviously a helluva lot more to investing; however, assuming simplicity is almost an end in itself in investment success rather than just a means, one can do a lot with just this much.

Forgetting you are a Marginal Investor in the business not the stock

Unless you are a short-term trader (don’t be one!), recognise that you are buying a part of the business. The distinction is important is because it sets a different kind of expectation, which in turn influences returns.

You’ll often hear about a company that is a great business and not a great stock. Over the long-term, this will converge because a stock cannot provide you with a return that is greater than the return the business provides on the invested capital. In the short to medium-term, the stock may under-perform. Such times, assess for yourself:

Is the company growing?

A business derives growth from doing better than its competitors while retaining pricing power in the market. This will have many underlying factors within it, which are worth analysing since growth is not an outcome of chance but purpose. Revenue, market share, price growth, and volume growth are some of the indicators of how well the business is doing at a fundamental level. Some of these numbers are easy to come by and analyse, others require some elementary effort.

If so, is the growth improving return on capital?

Growth for the sake of it translates into poor return on capital. Whatever cash a business needs to fund growth with is cash that isn’t flowing to its owners. Hence, stellar top and bottom line growth may not mean much if excessive capital is being used to generate it.

The above questions preoccupy management and promoter time. There is no reason why they shouldn’t preoccupy you, the public shareholder, too with some sense of proportion.

Paying obeisance to Mr.Market

Graham explained the working of the stock market through an allegory. According to him, Mr.Market is a co-owner of the business alongside you. He comes to work every day bids to buy what you own when he is wildly optimistic or asks for a price to sell you what he owns when he is very pessimistic. His ‘bids’ and ‘asks’ fluctuate every day, minute, and second, day after day, reflecting his estimate of the business’s value even though nothing in the underlying business fundamentals has changed in that time. Each time you turn Mr.Market away, he comes back with a revised offer, influenced by expectations, biases, opinions, or even his mood of the day.

This allegory is useful in understanding the role of emotions in market price movement. Theories about market efficiency went full circle from Mr.Market to the Efficient-market Hypothesis and back to a recognition of the role of emotions and animal spirits in pricing. Perhaps the best endorsement of this approach comes from Warren Buffett who regards this as “the best part of the best book [Graham’s The Intelligent Investor] on investing ever written”.

Takeaway for the investor: market price is a reflection of Mr.Market’s mood of the moment, not the business’s value.


Disregarding Margin of Safety

Margin of Safety (MoS) in investing refers to the proportion by which Mr.Market’s price is lower than your estimate of what this business is worth. MoS is something you naturally want to maximise. But why?

MoS takes care of all the guesstimation, assumptions, hole-plugging, and bypassing that are a fundamental part of trying to assess business value. The best value investors will tell you that in investing it is far better to be approximately right than precisely wrong. More mistakes have likely been made in the pursuit of precision than in making educated guesses using organised common sense. The reason is obvious: the false confidence that comes from precision leads to bigger bets and bigger mistakes. MoS then takes care of what may be important but not knowable.

Think of it this way: if you are driving a truck weighing 9 tons and need to cross a bridge, you will confidently go over it if the load bearing weight of the bridge is 10 tons. More so if the bridge spans a 2 feet deep gap. But would you if it spanned the Chenab River?


Think like an owner, ignore fluctuations, and keep risk in the foreground – with this, you may not see big home runs but you will make fewer mistakes. Long-term investment success, despite what many will tell you, is about the latter rather than the former.


New Year Resolutions are ‘D.U.M.B’

‘Tis time for New Year’s Resolutions, which alongside Goal Setting and Performance Appraisals may be the most utterly useless exercise that humans indulge in. 

In corporate jargon, goals need to be “S.M.A.R.T”, i.e. Specific, Measurable, Achievable, Realistic, and Time-bound. New Year Resolutions are, in contrast, “D.U.M.B” (Distant, Unclear, Malleable, Bullshit). Giving yourself the long leash of a year to become a better, fitter, prettier, healthier, richer person (or whatever else you desire to be) is a self con.

We are all perfect, rational, healthy, smart, pretty, and happy people in the future. But who will get us there if not our present self who is out to self-delude?! Truth is that we do not treat our future selves too well. In fact we treat them quite badly not just through active mistreatment of ourselves (gluttony, over-spending, too much drinking, laziness, procrastination…) but also by bumping responsibility for saving, getting fit, losing weight, being [truly] happy on to them. So in some sense, our interests are competing with our future selves.

Ergo, remember that your competition isn’t your co-worker, fight partner, classmate, boss, spouse, kids….IT IS YOU!

true nobility

Go with daily goals, even weekly goals but no longer. Benchmark yourself, compete with yourself. A personal example: for the past 15-16 years, my specific goal has been to see myself as the fittest I have ever been. This helps me to a) work on improving myself continually; and b) realize that I cannot rest on my achievements since there is tomorrow to think about. With some effort, this goal has been mostly realized. I may or may not be able to outrun the average 18 year old today but I can certainly outrun my 18 year old self (and the others who followed) if he were to come Back To The Future. For this I cannot pat my own back; I have that 18 year old and his successors to thank for the sacrifices they made and the hard work they put in for their future self, me.

This new years (months, weeks, days, and moments) fight yourself and your laziness, set goals that compare you with you, and mind incrementalism:

Positive Incrementalism                                Negative Incrementalism

Drops maketh the ocean, each Paisa the Crore, Milligrams the KG, and Steps the Marathon.

June @ The Beach – thoughts on overcoming fear


June, our 2.5-year-old German Shepherd spent a day on the beach with us. The open space, the sun, the sand….all of it made us eager to get there. The water though didn’t hold out much excitement for us since we believed that she has a mild form of Hydrophobia (as do I; maybe it’s genetic!!). Plenty of myths exist about some breeds’ fears, including that pointy eared dogs dislike water. The only truth is – and where I am at fault – is that lack of early exposure leads to reluctance.

It started with a good warm up – I got onto an All Terrain Vehicle (ATV) and sped it for well over a kilometre with June chasing me at full pace for the entire length. Once done, it was time for her favourite fetch game with a tennis ball.

After a while, my 10-year-old son Vyyom bravely decided to venture out into the water (having lived away from the coast since quite a few years now, it was his first time too!). June watched him for a while as he mustered up the courage to keep going further out, stepping back each time a tiny wave got to her feet, continuously whimpering at the growing distance. She gradually kept pushing her boundaries and soon enough got to a depth wherein she needed to paddle to stay afloat. It was a shocker for us having seen her strong reluctance even to get her feet wet every time we tried earlier. This time, without any encouragement, coaxing, or force she comfortably moved ahead. We were beaming with pride, smiling in a way that only a proud parent could (leading the small crowd at the beach to wonder what we had been smoking!).

The reason to my mind could be one of two (or maybe even both). Seeing Vyyom venture forth, she may have felt a strong instinct to protect him – she is very protective of Vyyom since he is the youngest in the family. The other reason (and the more likely one) could be that she saw this kid, who is in a way her ward, doing something that she is hesitant to and this cognitive dissonance helped her to overcome her fear. Either way, seeing her confidence bloom thrilled us no end, goose bumps and all.

How naturally this happened makes me think that kids (canine, human, or any other form) should clearly not be forced to try and overcome their hesitation or fears. They will do it on their own terms, when they feel the time is right; the only thing they need is motivation to do so. But there is something worse than using force; it is not providing them the opportunity to overcome their fears. After all, you can’t overcome what you can’t face! As far as June is concerned, visits to dams, lakes, and this time around the beach are becoming routine and perhaps the recurring exposure helped her to push her limits. If we had assumed that a beach is just not the place for her then all of us would have been so much poorer for the experience and this golden moment would never have happened.

Human children have many temptations to keep them indoors and after a point would be perfectly happy to become couch potatoes. Dogs however need the outdoors (and no, there are no “house” dogs that are meant exclusively for the indoors! Did you know that those cute little Dachshunds are actually hunting dogs?). Take them out as much as you can and let their confidence grow; they’ll take to the outdoors like, well….fish to water! This growing confidence will reflect in lot of their behaviour in everyday circumstances making them happier beings who will pleasantly surprise you all the time.

Now, my only further hope is that her fortnightly baths will become easier after this 😊

For more pics of June @ The Beach: https://photos.app.goo.gl/tEH0Wg8jgPbmjXzE3

3 Charts That Demolish Vijay Rupani’s Tweet (and politics)

The so-called Gujarat Model is what led to Modi’s rise. A magnet for investors, an industrial hub, a wannabe financial centre, above average GDP growth, ~7-8% of India’s economy….the State would be ignored by industry at its own peril.

Hence, a Gujarat CM’s opinions attract a fair degree of attention. Vijay Rupani, given charge of the State after Anadiben Patel’s failure in managing multiple crises, in charge of administration and more importantly, ensure a BJP win in November 2017 weighed in on Beef Politics with this tweet:


The bovine platitudes in this tweet ranged from the ridiculous (like ‘single-most’) to the absurd (relevant for the ‘whole world’) to the pathetic (the ‘moral and spiritual’ precedence). Rather than lampoon this tweet on histrionics or anecdotal arguments, let’s use irrefutable data. The proposition is that beef consumers are morally and spiritually degraded and that saving the cow is the only salvation for the whole world. So let’s compare the paapi cow slaughterers of the world with India:

Firstly, who are the biggest sinners?

beef consumption

Despite being the 5th largest Beef exporter of the world, India hardly consumes any of the stuff itself. Most of what it does is Buffalo meat anyway. So India compares well with these lands of sinners.

Now, all this beastly consumption of the sacred cow must screw with people’s intellect first, surely reducing them to brainless twits? Look at the PISA scores of the countries for this. The Programme for International Student Assessment (PISA) is a worldwide study by the Organisation for Economic Co-operation and Development (OECD) in member and non-member nations of 15-year-old school pupils’ scholastic performance on mathematics, science, and reading.


Sooooo….there’s no salvation here from not enjoying those steaks.

Next up, HDI. The Human Development Index is a composite statistic of life expectancy, education, and income per capita indicators.


On this composite indicator, Indians do not enjoy a longer, smarter, or richer life by avoiding Beef.

What’s left? Let’s include one materialistic parameter. GDP per capita. To be fair, let’s use PPP basis, which adjusts for the lower price levels in India and thus ranks the country higher.


So big-time Beef consuming populations are smarter, healthier, richer, and fairer societies and the people there live longer!

I am not even beginning to suggest that we should start eating Beef to get as rich, healthy, or smart as them. The data above does not suggest that if one believes that correlation is not causation. The rhetoric from fanatics (even more definitely) does not suggest that we are going to gain anything from avoiding cow slaughter.

Then again, Vijay Rupani may be on to something. After all, ‘moral and spiritual degradation’ is so much more of a threat than hunger, malnutrition, poverty, or illiteracy. In the after-life anyway.


Disclaimer: Written by a sworn vegetarian who does not envy his abilities in Science, Math, or Reading but recognises right wing bovine excreta when he sees it. 


It’s 2009 again – in Melbourne and in Indian B-School campuses


Like millions of others, I loved this year’s Australian Open final. Way back in 2009, watching a Federer:Nadal final, it was unthinkable that we would still be watching another such in 2017. Fact is, it was unthinkable even at the start of the Open this year. It feels like 2009 even on B-school campuses, much as in Melbourne except that it isn’t bringing any cheer with it.

I completed my 1 year MBA in April 2009, passing out into what was arguably the worst job market of all time, at par with the dot com bust of 2000 (incidentally, the year in which I completed my ACA!). Barring hypertension drug makers, everyone was reeling at the after effects of the 2008-09 financial crisis and there seemed no silver lining in sight at the beginning of 2009 when B-school placement season kicked off. It felt like Open Season with lots and lots of hungry hunters but no game in sight.

Sitting here 8 years later it feels like 2009 redux, though some would disagree. The intensity of the job drought may be lesser but it does feel like this year’s passouts have also been hard done in. A quick comparison of timelines for a student in 2008-09 vs 2016-17 in the run up to the Nov-Mar placement season:





Bear Stearns collapses, opening the academic year on a dismal note E-commerce firms belatedly report severe stress, driven by lack of further VC investment


Lehman collapses, triggering a worldwide financial crisis that cripples banking and economic growth After effects of the now certain Brexit, Fed rate increases more certain, and growth rates moderating more surely in India and China


26/11 attacks and speculation of war with Pakistan compounding the effects of the financial crisis The Demonetisation shock puts activity, growth, and sentiment on the chopping block, albeit temporarily


Satyam scandal breaks, casting a shadow over Corporate India Trump’s clampdown on immigration and resultant uncertainty over IT business model

So we entered the current year’s placement season with severely curtailed E-commerce recruitment (barring Amazon) and demonetisation-strained industry and services sectors (especially Real Estate, Retail, Auto). All this in a world that had suddenly turned more insular. None of this makes for a job market ready to absorb all the aspiration-giddy management graduates.

Lessons from 2009?

Lesson 1:

The UPA victory in May’09 (and what it did for market sentiment) and the worldwide stimulus push created a 2 year boom that was exceeded in its impact only by the hubris seen in 2003-2007. Who would have thought this possible even as late as March 2009? So Lesson 1 is that ‘It is darkest before dawn’ may hold some truth.

Lesson 2:

UPA 2 turned out to be the most mocked and reviled administration due to the policy stasis and the corruption that marked its years. The worldwide stimulus fed a commodity and leverage boom that went on to cripple secular and sustainable growth. So Lesson 2 is ‘Be careful what you wish for’.

Most of all, these cycles make us humble. They play out on the back of mega-macro factors that no one can control and can have unforeseen and unintended positive or negative consequences in the years to come.

Perhaps the first step towards adjusting to these realities is developing a higher degree of circumstance acceptance as against blaming circumstance, other individuals, or oneself. 6 simple words in 2 of the deepest philosophies of all time help: ‘Shit Happens’ and ‘This Too Shall Pass’.

The next step is to position yourself as best as you can for the time when the cycle will turn (and turn it will). If you are lucky, it may be in a couple of months (and a sustainable one). If not, a tad longer.


PS (to 2017 passouts): This wasn’t meant as advice, consolation, or a source of solace, much less as a way out of the current mess. All it tells you is that there were many before you who went through the same (and worse) and that there will be many more to come. Our misery or trying circumstance does not make us special; though how we respond to it can. 

The 7 Plagues of Indian Bank Stocks


The Indian banking sector has been an investor favourite for a while, and why not. The secular Indian growth story has its believers and one couldn’t have faith in this story without loving banks. A credit hungry Indian corporate sector, an under-leveraged and aspirational consumer class, millions of hitherto un-banked individuals being compelled to open bank accounts in order to receive cash subsidy payouts…..good times, it seems, were always around the corner.

Case in point on the investor love for banking stocks was the recent frenzied buying of the HDFC Bank stock by FPIs when the RBI opened up the trading window for them, albeit literally just a crack.

The party pooper is as much of a reality though. And there’s 7 of them!

1. NIM pressures
Investors for long were bullish on widening Net Interest Margins (NIMs). Part of the expectation was driven by the trajectory of lower benchmark interest rates – banks immediately lowered deposit rates while longer term corporate loans took longer to reprice, thus widening NIMs. The recent demonetisation move added to the enthusiasm – banks were flooded with cash deposits and they opportunistically reduced deposit rates since the move couldn’t dampen deposit growth.

The consensus is that benchmark rates aren’t headed much lower any more. Thus, with limited room for cutting deposit rates further and continued pressure to reduce lending rates, besides the fact that repricing and fresh loans will reduce average lending rates, the NIMs will continue to be strained; whether benchmark rates are benign or lower.

2. Continued NPA stress
ARCs, the new bankruptcy code, stringent action against willful defaulters….put together, these initiatives were expected to finally usher the new dawn for stressed bank balance sheets.

Even as the wave of bad loan buyouts by ARCs turned out to be case of ‘Waiting for Godot’, regulations have only made the nascent sector struggle. In August 2014, the RBI tweaked the rules and increased the upfront payment to be made by ARCs from 5% to 15% of takeover value, which messed up the economics of the business just when it had begun attracting some heavy names and even heavier capital. The buzz is that RBI is inclined towards an even larger up-front payment requirement, which may make the already difficult task of attracting the massive capital the ARC players need, even more difficult.

This could prove particularly worrisome for the stand-out PSBs like Indian Overseas Bank (GNPA of 22.4%!), UCO Bank (GNPA of 17.2%!), UBI (GNPA of 16%!), IDBI Bank (of Kingfisher fame; GNPA of 15.2%!), and Bank of Maharashtra (GNPA of 15.1%!). Private banks have stressed asset ratios that are much lower but are at levels that cannot be deemed healthy by any yardstick. Even a quality large bank like HDFC Bank has seen GNPAs escalate steadily from ~0.9% levels in mid-2015 to 1.05% currently. A bank far lower down the quality ladder, though equally important to the sector due to its size, Axis Bank has seen bad loans rise to as much as 4% in Q2!

While total stressed assets are staying where they were (est. at ~12% of total loans currently) due to continued financial stress with large borrowers, SME borrowers and Real Estate firms may start deepening the strain post demonetisation.

3. Anemic credit growth
The primary reason to love Indian banks was the strong credit growth rates that India was witnessing – in the pre-financial crisis years, this was as high as 35% and even since 2008 has averaged a healthy 15%.

Credit growth at 3% is now at par with or lower than most EMs AND developed economies. Retail was the only sector that was consuming bank credit in a big way and this has come crashing down after November’s policy move. Presently, corporate and SME credit growth rates, both of which haven’t been anywhere near healthy in a while, stand at 0% and 0.4%! Post-demonetisation, Real Estate, the informal sector, and consumer finance are likely to take a worse hit and we cannot expect credit growth to nudge past 10% in the medium term (next 2-3 years). If banks can’t deploy funds profitably then what can they do?…

4. Record G-Sec buying
…they can buy G-Secs in the absence of lending opportunities!

G-sec buying is at a 7.5 year record high and continuing. With lending proving either unattractive or suffering due to lack of credit growth, or both, the surge in deposits post demonetisation is finding its way into purchase of G-secs. This table would make one wonder what the business of banking in India is all about currently:

Bank Variable

~ YoY growth as of 01/2017





Investment in G-secs


Unsurprisingly (though interestingly), the G-sec buying boom, the deposit boom, and the credit slide have all happened after 11/2016.

Since everyone agrees there is limited room for further rate cuts, how much will this yield banks in treasury gains? ¯\_(ツ)_/¯ 

5. Consolidation helping but at what cost
The ‘on again, off again’ SBI mega merger is iffy enough and aimed at absorbing relatively poor balance sheets into a larger, relatively cleaner one. Taking that one at face value, now there is talk about a bank like Axis (with its not-so-pretty balance sheet) and Kotak (with its own pre-ING acquisition gold standard balance sheet) merging. At its most benign, such a merger would a zero sum game, i.e. one where Axis gains and Kotak loses. In reality though, such a move would end up reducing the already few ‘Good’ banks that are out there!

6. No room for massive recapitalisation
The focus of the government in the coming months and in the run up to the 2019 elections will be on reviving and sustaining capex. This will not leave them with much ability (or cash) to recapitalise PSBs. Indradhanush and BBB didn’t achieve much and now there is talk of Indradhanush 2! Unless that Dhanush comes laden with hard currency for capital, it may prove to be yet another arrow shot in the dark (with full-on pun intended).

Moreover, there is strong speculation of NDA doing a (yet another) UPA in coming up with a farm loan waiver before 2019. Hence, not only does the government not have any capital for the banks, it may well just use the banks for cultivating its vote bank!

7. Competition turning unconventional
We have been through anemic credit growth, lowered risk appetite, lack of capital, new found love for investment in G-secs, bad balance sheets, and the like. Let’s say for a minute that many of these realities are dispensed with and we get into Michael Porter mode (he of the 5 Forces framework).

In areas like Retail Finance, which was the last bastion of growth for banks, competition is coming from hungry and lean firms like Bajaj Finance, niche NBFCs, and newly revived firms like GE Capital, apart from well funded fintech startups. The Edelweisses and Anand Rathis of the world have enthusiastically stepped in into the SME lending void that banks have created in the somewhat mistaken belief that small borrowers carry higher risks. These competitors have lower cost bases (fewer physical branches, no messy unions, more use of tech for processes, outsourcing, etc.), cleaner balance sheets, and are subject to fewer regulations….how can banks compete?

The factors listed above aren’t going to make Indian banks unattractive investment opportunities overnight. They will play out, though over the medium term. One does need to worry though considering that the average concentration towards the Banking sector in large-cap Mutual Funds is ~1/3rd of fund size. Pick up any scheme and at least 4-5 of the top 10 holdings will be banks! How are these funds going to unwind this Gargantuan holding if the stocks fall out of favour or if any or all of these factors suddenly play out more expeditiously? Who will step in to buy? Who can these banks bank on?

Simple(er) & Targeted Demonitization

Since Modi ji a) is so inclined towards a clean up; and b) can do no wrong, why didn’t he do something simpler, more elegant, and targeted on demonetization? Here’s a thought.
In May 2014 or soon thereafter, he could’ve issued a notification to start Rs2,000 and Rs5,000 currency notes. Maybe even a Rs10,000 note. It could’ve been easily justified since he had harped so much about the inflation that UPA policies had caused. Large transactions in the cash economy would’ve shifted to these new currency notes and the (imagined) massive hoards of cash would’ve also been converted to these. Perhaps even some of the bullion holding would’ve moved to currency, given the much higher liquidity and safety vs gold coins/bars.
Alongside this, over a 2-2.5 year period, Modi could’ve encouraged a stronger shift towards e / digital payments to reduce dependence on cash especially for small transactions. He has done a bit but nowhere near enough. I am given discounts by MSEB (a state undertaking) to pay my electricity bills in cash at their counter. If I want to pay by card, I do not get the discount for early payment and in fact I am charged an extra processing fee! What shit! Have your mug on front page Paytm ads ex-post doesn’t do much good.
Cut to 2.5 years later, he could’ve abruptly issued a notification (as he did) stating that these new, high value notes are no longer legal tender. Rest of the process would be the same as the current demonetization exercise except that people would be given less time to exchange or deposit (say 30 days vs the extant 52). Since the number of people holding these notes would be much smaller, a smaller time window is justified. Phasing out of old 500/1000 notes could also be an option, though not as abruptly.
In that case, who would suffer disproportionately and deservedly? The black-marketers. Who wouldn’t suffer needlessly? The general public, the people without IDs but with legit savings that over time have accumulated to a substantial sum, traders who cannot shift away from cash this quickly, their customers, etc.
The intent behind the issuance could’ve remained an even tighter secret. In fact, no one other than Modi need have known. The problem with this would be that black-marketers would rush to convert 2000s and 5000s into 1000s. However, with the shorter time frame for complete de-legitimization, who would offer legal tender in exchange? The other drawback of this idea would seem to be that it is one-trick pony and that trick can also be pulled only once. No black marketer would put faith in very large currency again – but then, isn’t that a solution in itself?! 🙂
Since everyone so strongly believes that physical cash is the biggest problem (IT IS NOT!), this would’ve served the purpose just as well without the rest of the misery.
Am I missing something? Is this too simple? Does this make too much sense?
This is not hindsight speak. This is a common sense question.

Demonetization: Wrong ‘Panacea’ For The Wrong Disease?


Demonetization may be much pain, little gain – just 7% of black money may be affected by demonetization. This even if we assume large sums are declared as income and taxed, and 18% (!) of high denomination currency is burnt or destroyed. Moreover, without targeting Real Estate and Gold holdings, there can be no real targeting of black money.

Modi’s intent has been clear right from his swearing in. The setup of the SIT, subsequent saber rattling, and the recent domestic and international IDSs have signaled the kind of war on the parallel economy that no political dispensation was willing to wage till now.

The PM would like to believe that the biggest of black marketeers are lining up to exchange a meager Rs4,000 while the poor are sleeping peacefully. Ideologies aside, it is useful to look at the utility of demonetization objectively. Many analysts consider the move to be detrimental to large sections of the economy. Some amount of demand, some sections of trade, some portions of the economy are now considered seriously impaired. This sounds alarmist but has some basis given that a large part of the population (maybe as much as 80%) works in the informal sector. Some leading economic analysts are placing the damage at around 50-100bps of GDP growth this year. Besides, there are plenty of logical arguments being made on how black money cannot be considered a stock (demonetization targets only a stock) but a flow, for which systemic and gradual solutions are needed, not shock treatment.

About the only two things everyone can agree on is that it was a bold move, and that everyone did a great job of springing the surprise. So how much is all this disruption and demand loss going to net us? Not much from the looks of it. Here, I try to work down from the GDP⇒Black Money⇒Black Cash⇒Demonetization Benefit:


* Latest estimates are from Ambit, which put it at 20%. Friedrich Schneider in “Shadow Economies and Corruption All Over the World: What Do We Really Know?” puts it at 23-26%. I’ve assumed 30% on the higher side.

From this black pie piece of ~Rs40.2 lac crores, there have been recoveries through raids and declarations. Adjusting for that:


So based on estimates, the net stock of black money after all recoveries in last couple of years through raids, surveys, and declarations is about Rs39.1 lac crores. This ‘black money’ can be estimated to be held as:


  1. India’s Cash/GDP ratio is 13%. Since black money is ~30% of GDP, it is assumed that black cash is also ~30% of total high denomination (1000s/500s) currency.
  2. Real Estate is ~15% of GDP. It is assumed that ~50-60% of the value is black given that 35-50% of property transactions and 75% of land transactions take place in cash (per experts, pan-India average).
  3. Gems & Jewelry is around 6-7% of GDP. It is assumed that most of this is based on cash generated through unaccounted income.
  4. Others is the balancing figure and would represent overseas deposits (estimated by BJP in UPA days at $500bn!), stock in trade, foreign currency notes, etc.

The total domestic black cash thus can be estimated at ~Rs4.5 lac crores.


Making some assumptions about what could happen with this cash pile with demonetization:

  • Say ~10% or Rs44,944 crs actually gets tendered to tax, earning the Government ~Rs15,730 crs as income tax @35%
  • A SBI report suggests that ~Rs2,50,000 crs worth of high denomination currency may actually get extinguished. I have used this estimate, though it appears unrealistically high.
  • ~34% gets deposited as legitimate cash. The Government continuously reiterates that deposits below Rs2,50,000 will not be questioned.

Thus, we have:44

So what will it take to deposit this large sum of Rs1,54,492 crs? Not much it seems. Even assuming the lower threshold of Rs50,000 (which is the maximum limit for Jan Dhan accounts), just 3.1 cr Jan Dhan accounts are needed to make the mark. Sounds like a lot? It isn’t.


It seems just 12% of the Jan Dhan accounts out there are enough to cover the remaining black cash. Just 12%! Reports of Jan Dhan account holders’ coercion by black marketers have already started floating in.

Against this (potential, uncertain) benefit, you have the disruption to growth/trade, Rs12,000 crs of currency printing costs, unquantified logistics and overtime costs that have been lumped on to banks for no fault of theirs, and dozens of avoidable, directly attributable deaths.

A few things that come out starkly from this:

  1. Even making these generous assumptions about currency extinguishment and declarations of income, just 7% of black money in annual GDP will be affected by demonetization (declared as income + assumed extinguished).
  2. Gaming is a reality. The above analysis shows that just 12% of the total Jan Dhan accounts are sufficient to cover the balance black cash, even after considering the reduced maximum permitted balance of Rs50,000 (as against Rs2,50,000 of permitted deposits). A sizable amount will end up getting deposited in regular accounts too.
  3. Without targeting Real Estate and Gold holdings, there can be no real targeting of black money. This makes sense: Cash isn’t safe, land/property is. Gold doesn’t deflate, perish or get demonetized, currency does. The hard, unaccounted cash is usually held for a purpose, which could be commerce or nefarious. Besides, if gold and property holdings had been targeted ruthlessly, the poor would’ve slept a lot more peacefully!
  4. Most of all, we do need to bear in mind that this minuscule 7% too is exaggerated in a sense. As a percentage of total black money stock, the recoveries would not even register. For eg. if we were to assume that total black money stock at market value is say 2x GDP (conservative estimate), the recoveries are 1.1%!

This is purely a numerical estimation of the immediate benefit (many assumptions, still more estimations). However, the estimates above are consistent with independent analysis quoted by P.Sainath here, and the insightful interpretations of Arun Kumar, an eminent economist who has closely studied the black money problem for decades. To specifically quote him:

“Of Rs 13 lakh crore, at least half would be used in businesses: petrol stations, railway stations, airports, etc. What may be held in households may be only 5-6 lakh crore [rupees]. Now, assuming that the top 3 percent of the population owns much of the black wealth, that would amount to only Rs 1.5 lakh held per person. So the immobilised cache of black money is just Rs 2-3 lakh crore.”

There will doubtless be some long term gains. People will move towards electronic payments and feel obligated to come within the system, the signs of which are already appearing. So is demonetization symbolic in that sense? Certainly. Is it effective? Certainly not in the sense it has been sold in.

Demonetization seems like a war on black money. A war with collateral damage moving up high in the objectives list.

The Fatalism of Dogs (and why humans should learn it)


June, my German Shepherd, got spayed last week (the process by which the dog is sterilized through removal of the ovaries, aka ‘fixed’). It was a decision we had taken when we got her since consensus medical opinion is that it provides the dog with a longer and healthier life. Besides, it takes one more pedigree female out of the breeding cycle, which does the dog and many potential generations to follow a favour.

Even with all her powers of perception, I am sure she had no inkling about what she was in for or what will follow. Occasionally she did throw me a look that suggested she knew what we were up to though.


Then again, perhaps it was just my nervousness at play. The kind of nervousness one would feel about one’s own child going through a surgical procedure.

The recovery process is not a long one; about 2-3 days of complete rest followed by another week of restrictions. What makes it complicated is that explaining the rationale, timelines, and need for restrictions to the dog is obviously  impossible. She was in good hands as far as the people operating on her were concerned – we as dog parents were full of trepidation only with regard to the post-operative care. We needn’t have worried much.

One of the primary concerns in the recovery is that the sutures shouldn’t be disturbed. Dogs have a tendency to lick and gnaw at anything that seems like it needs fixing. To prevent this, an e collar is used. This [nasty] little device prevents the dog from reaching the sutures.


The unintended effect is that the dog is also unable to perform many necessary acts like cleaning up after peeing and pooping (you’d be surprised how scrupulous dogs are in keeping themselves clean), scratching an itch, cleaning the ears, rubbing their chins on their family, accessing food in the bowl, etc. Basically, many things that make a dog, a dog.

The first day of adjustment was terrible, as expected. By the second day, June had figured out ways to reduce the inconvenience. The discussion at home between us was about what would be going through her mind in terms of this darned appendage that stops her from doing what she wants to and when she’ll be rid of it. This made us wonder about what goes on in the minds of these wonderfully intelligent creatures.

My theory is that unlike humans, dogs are very fatalistic in their outlook. In a nice way; perhaps stoically fatalist. After the first day, the e collar was probably accepted by June as an appendage. It was considered by her to be permanent and something that needs to be adjusted to – and sooner the better. This, I think, helped her figure out ways to do things differently and more effectively.

What would we as humans have done? Irritation at being forced to wear it, cursing ourselves (and whoever else) for getting into this situation in the first place, counting the days when we’ll be rid of it, ruing everything we are missing out on…..all things that make reconciliation difficult and the mood bitter. Cultures that are fatalistic in their outlook are as such because they preach what is natural to living beings. Most religions at the basest level actually encourage this sense of acceptance. It is not a blind, handicapped acceptance of circumstances – rather it is a means to figure out the most comfortable way out or around the circumstances. We consciously choose to ignore whatever little that culture and religion have to offer that is truly useful.

June has another week to go before the e collar comes off. I cannot begin to imagine her elation when it does. June is just another dog in this sense – what is true for her holds true for other dogs as well. I just wish it held true for us humans as well.

‘Change everything you can that needs changing (including yourself); accept the rest’