Indians Are Spending Their Rs 2,000 Stash, Not Depositing Them

Behavioural economics is a thing. It looks at economics & psychology to understand how and why people behave in a certain way. As opposed to regular economics and I suppose economists who thought (if any went into it at all) people would line up at banks to exchange or deposit their slowly demonetising Rs 2,000 notes.
Turns out they prefer to buy things, blow it up or give it to god, quite literally. This is possibly good news for the economy for now but eventually the money has to reach the banks. What happens then?
This and more takes in today's The Core Report.

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TRANSCRIPT

NOTE: This transcript contains only the host's monologue and does not include any interviews or discussions that might be within the podcast. Please refer to the episode audio if you wish to quote the people interviewed. Email [email protected] for any queries.

Good morning, it's Wednesday the 24th of May and I'm Govindraj Ethiraj with The Core Report, coming to you from Mumbai, India's financial capital and most rocking city in the world.

Here are our two quick reports, theme of the day and our Hmm section lined up for you today.

1.Moody's says India's GDP has crossed $3.5 trillion in 2022. And there's a but…
2. Electric two-wheelers will cost more now as the government slashes subsidies and the developments leading upto this were avoidable
3. The daily Rs 2,000 note not in circulation update;
4. Hmm, Adani's lone ranger investor and supporter hikes his bets

The Top story

India's GDP has crossed $3.5 trillion in 2022 and will be the fastest-growing G-20 economy over the next few years, rating agency Moody's said today.

That's pretty much where the good news ends.

The rating agency points out, like most other agencies who do country reports, that bureaucracy could slow approval processes in obtaining licences and setting up businesses, prolonging project gestation.

"India's higher bureaucracy in decision-making will reduce its attractiveness as a destination for foreign direct investment (FDI), especially when competing with other developing economies in the region, such as Indonesia and Vietnam," Moody's Investors Service said.

Let's pause there for a moment. The countries we are positioned against as per Moody's are Indonesia with a $1.1 trillion GDP and a population of 281 million while Vietnam has a GDP of $366 billion and a population of 99 million. Thus both countries have higher per capita GDP.

Moody's said that ongoing efforts by India's government to reduce corruption, formalise economic activity, and bolster tax collection and administration are encouraging, although there are increasing risks to the efficacy of these efforts.

Moody's also pointed out that while demand across the manufacturing and infrastructure sectors will grow 3-12% annually for the rest of the decade, India's capacity will still rank well behind China's by 2030.

It said despite the economy's strong potential, there is a risk that the pace of investment in India's manufacturing and infrastructure sectors could slow because of limited economic liberalization or slower policy implementation.

A large young and educated workforce, increasing nuclear families and urbanisation will fuel demand for housing, cement and new cars.

Government infrastructure spending will bolster steel and cement, while India's net-zero commitment will drive investment in renewable energy, it said.

Our next report

The Rs 2,000 note saga continues.

More news on the Rs 2,000 note that according to the Reserve Bank did not see much circulation. The poor note has evidently circulated more in the last three days than perhaps its lifetime.

Be that as it may. Various reports including from Reuters say from mango sellers in south Mumbai to expensive watch shops in central Mumbai, Rs 2,000 notes are flying thick and fast now.

A temple in Himachal Pradesh found 400 such notes worth Rs 8 lakh in its donation box, the Mint reported. If a small temple could pull so much so fast, I can only imagine what the bigger temples will draw. Hopefully the devotees will get better service and water and shade (also promised in bank branches) in hot summers.

Gold continues to be a favourite and will remain so for some time. Petrol and fuel is not far. Petrol pumps are saying people are turning up with the big notes.

The problem for many is not the currency itself - at least right now- like any marketplace, there are people buying long and selling short. It is that most people don't have the change to return. So if you are stepping out to buy mangoes with a Rs 2,000 note, make sure it's a dozen at least

The two-wheeler electric theme continued

It was a party that was almost destined to end badly. Huge Indian Government subsidies given to the electric vehicle industry have been cut back with effect from June 1.

Thanks to which prices of popular models of electric two-wheelers brands like
Ather and Ola are set to go up, quite sharply.

The Government's Heavy Industry Ministry has notified two changes.

One that the demand incentive as it's called has been reduced from Rs 15,000 per kWh to Rs 10,000 per kWh. Kwh denotes a unit of energy when referring to battery capacity.

More importantly, the Government has said that the cap on incentives for electric two-wheelers would come down from 40% to just 15% of the ex-factory price of these 2-wheelers.

This means a scooter that cost Rs 100,000 earlier could cost Rs 140,000 now. It is very likely manufacturers would absorb some of the hit and the difference may be less. But it will be significant nevertheless.

The electric two-wheeler companies are putting on a brave face saying this was bound to happen and they had to get ready for a subsidy-free world.

Actually, it was not bound to happen like this.

The government appears to have reacted to the violation of localisation norms. For example, I as the government am giving you a subsidy for making in India but you go and import components from China, like cheaper batteries, then we have a problem.

As I mentioned in The Core Report earlier, both Ola Electric and TVS Scooter at the beginning of this month said they would refund some monies to their customers. Ola said it would cover the cost of chargers for its electric scooter customers. Ather Energy, another electric maker said the same thing.

Subsidies are given to electric vehicles across the world because they are a way to incentivise the fight against fossil fuels and reduce global warming.

For example, buyers of electric cars in the United States qualify for a tax credit of $7,500 as long as the final assembly of that car is in North America and some other conditions on battery production as well. On a vehicle price of $40,000 to $50,000, this is substantial.

Subsidies given for these two-wheelers, under the FAME programme, which stands for Faster Adoption & Manufacturing of Electric and Hybrid Vehicle II programme, would have run out soon, according to reports. The end date was March 2024 for the scheme and it does look like it's being pulled back earlier. A total of Rs 10,000 crore for all electric vehicles including charging infrastructure was outlined.

The subsidy could have continued if industry had behaved itself and focussed on building locally as it was supposed to. The fact that many manufacturers did not seem to have put in sufficient effort is unfortunate, given that many of them are new generation, entrepreneurially driven firms.

Higher prices may not be viable for customers and lower prices may not be viable for the manufacturers unless they become more viable and faster by building scale and working on the cost of technology, notably batteries.
Maybe the final outcome might still be good.

Hmm

US-based investor Rajiv Jain's GQG Partners LLC has raised it's stake in billionaire Gautam Adani's conglomerate by about 10% and has said in five years they would like to be one of the largest investors in Adani Group, depending on the valuation, after the family.

We would certainly want to be partners in any of Adani Group's new offerings, he told Bloomberg News. According to him, the value of GQG's Adani holdings was close to $3.5 billion though did not specify which companies he bought into or what part of the investment value came from direct purchases and rallies in Adani shares.

In March, Jain said it acquired almost $2 billion worth of shares in four of Adani's firms from a family trust.

Jain is clearly a contrarian and some would agree with his observations on the fundamental nature of Adani's companies, being in the businesses they are and backed by solid assets, whether ports, airports or cement plants.

His statement that he would like to be the largest investor in the group after the family is a little strange though. It acknowledges that the family has a vice-like group on the floating stock, seen widely as a problem in more ways than one.

Second, by locking himself into such a position and by saying he would like to be a partner, he is committing himself like a strategic investor rather than a financial investor.

GQG says it has $88 billion under management which makes it large. It is not clear which of the many funds it has is investing in Adani stocks and what those funds are promising or committing to their inventors.

Jain is listed as the founder of GQG but the investors in his many funds am sure would like to know more of his specific strategy on how he is investing their funds.

For now, Jain's bets, given the way the stock prices of Adani companies have zoomed in recent days, have clearly paid off.

In March, GQG acquired almost $2 billion worth of shares in four of Adani's firms from a family trust. That initial investment in the beleaguered conglomerate bolstered the tycoon's companies after they were accused of "brazen" stock-price manipulation and corporate fraud by New York short-seller Hindenburg Research, causing Adani Group at one point to shed more than $150 billion in market value.

The Indian-origin investor who works from Fort Lauderdale in Florida, said he was unconcerned by the short seller's allegations, which Adani has repeatedly denied and that Jain characterized as par for the course in India's business context. Over a 30-year investment career, "I've yet to come across a perfect company," Jain told Bloomberg News earlier this year.

Jain has also justified his contrarian investment by pointing to the value of Adani Group's businesses, including its coal mining and airport assets, which are tethered to India's development goals. Prime Minister Narendra Modi - who is seen to share a close friendship with Adani - is pushing domestic business houses to build up critical infrastructure and lure manufacturing away from places like China.

Market momentum appears to be in Jain's favor for now as Adani Group stocks surged after an interim expert panel report submitted to India's Supreme Court last week found no conclusive evidence of stock-price manipulation by the conglomerate.

The government has reduced the subsidy provided under FAME-II (Faster Adoption of Manufacturing of Electric Vehicles in India) scheme applicable on electric two-wheelers registered on or after June 1, 2023.

The Heavy Industries Ministry notified the changes. For electric two-wheelers, the demand incentive will be Rs 10,000 per kWh. The cap on incentives for come electric two-wheelers will be 15 per cent of the ex-factory price of vehicles from 40 per cent at present.

The Faster Adoption and Manufacturing of Electric and Hybrid Vehicles (FAME) India scheme commenced on April 1, 2019, for a period of three years, which was further extended for a period of two years up to March 31, 2024.

The total outlay for FAME Scheme Phase II is Rs 10,000 crore to provide incentives to buyers (end users or consumers) of electric vehicles to enable wider adoption, which may be encouraged as a purchase price. The scheme is exclusively for public and commercial transport in the segments of electric three-wheelers (e-3W), electric four-wheelers (e-4W), and electric buses.

Additionally, the total subsidy is now limited to 15 per cent of the E2W's ex-factory price (which cannot exceed Rs 1.50 lakh), compared to the 40 per cent limit in place at present. This spells a subsidy reduction of over 60 per cent for several manufacturers operating at the premium end of the market.

The amount originally allocated by the government for E2Ws, under the Faster Adoption and Manufacturing of Hybrid and Electric Vehicles (FAME-II) scheme, which was fixed at Rs 2,000 crore, is nearly entirely exhausted. In order to ensure subsidy support isn't withdrawn entirely (and abruptly) in a way that hurts the industry, the heavy industries ministry has decided to allocate an additional Rs 1,500 crore to E2Ws from the unutilised funds allocated for electric three- and four-wheelers under the scheme.

Notably, the FAME-II scheme is scheduled to end on March 31, 2024, and there is no word on whether the scheme will be extended at all.

Range-topping models from manufacturers such as Ola Electric, Ather Energy, Tork Motors and Hero MotoCorp (Vida), which, up until now, qualified for an incentive of as high as Rs 60,000 thanks to their large battery packs, will now be eligible for a maximum incentive of Rs 22,500 – less than half of what was offered so far. As a result, their prices are expected to go up by a substantial amount.