This does have to do with India’s GST, so please bear with me for a couple or three paragraphs.
Retail and commercial banks make money on the spread – the difference between the rate at which they charge interest on credit extended (money out – assets) and the rate at which they pay interest on deposits (money in – liabilities). Therein lies the problem with zero or negative interest-rate policies (NIRP, ZIRP) currently decreed by central banks. A bank cannot offer any interest to depositors if – because of ZIRP – its loans are paying anaemic income. Even if a bank receives, say, 2% on credit extended, it will not cover its costs – let alone make enough profits to survive in a competitive market – unless it offers -1% or less on deposits. Many banks, even Deutsche Bank, are already on the point of expiration and this regime will only make financial euthanasia across the industry the norm.
If official interest rates are 0% or just above, deposit rates must be negative – that is simple math and goes for returns on pensions and everything else. Taking into account also the effects of inflation at an average of 2% per year, then the value of one’s assets/pensions could halve in as little as 15-20 years.
In that case deposits quickly dry up as people withdraw cash from extortionate bank accounts – this is supposedly part of the central bankers’ deliberate strategy to get people to spend rather than save in order to stimulate the economy. Banks in turn come to depend ever more on issuance of credit from central bankers to supply the raw credit to keep the whole show going. In the meantime aggregate demand actually collapses – not what was planned – because consumers after all are not stupid and realise their only hope of survival is to save money outside of banks and not spend valuable and vanishing cash on things they do not need to survive.
Governments counter by demonising cash and attempting to make all transactions electronic (at present we are in the early stages of this campaign) so that consumers cannot possess cash outside of banks accounts – forcing them to ‘use it or lose it’. Next, the population responds by finding alternative stores of value to fiat, government-issued currencies – gold and precious metals, bit-coin – as a prelude to the establishment of a quasi-barter economy outside the control of the authorities.
As this is happening, capital investment is destroyed (no return on investment; no demand for new goods anyway), productivity and tax revenues decline (debt destroys productivity, people earn less and pay less tax), and governments borrow until they go bust or hyperinflation ensues. It’s the end of civilisation as we know it!
Or maybe not quite; but it is not good, which leads us to the question of where and what is good in this monetary climate, and as I have been yelling at the top of my voice for some time now, that thing, that place is India. Despite all its problems – large non-performing loans from the last Congress-government period, undercapitalised banks and creaky infrastructure and bureaucracy – India has an official lending rate of 6.5% and a growth-rate of GDP (for what that’s worth) which is slightly higher. If you are an investor, this is heaven compared to the rest of the (civilised) world: the USA and UK will give you 0.5%, and governments bonds even less than that because everybody wants that juicy half-percent return. (Hungary is 0.9% – stop laughing.) Of course, you can get 13% in Brazil or 7.5% in Turkey, but personally speaking, that is nowhere near enough.
India on the other hand, at the beginning of a double-decade period of transformation into an economy that will be one of the three biggest in the world, is a stable, modernising democracy that speaks English and sits in a place both geographically and politically that is a global pivot and mainspring. There is only one direction of travel for India from here, which is not something you can any longer say about China, next door.
Of course there is a long way to go, but that is a very good thing, because already, even absent the imminent improvements promised by its GST, India is starting to boom. Sachin Bansal, co-founder of Flipkart (India’s Amazon) recently wrote a very good piece for the Times of India. India’s is a federal system, similar to the USA, and is in the process of increasing the federalised elements of the system by increasing the autonomy – the rights and powers of individual states – relative to the central administration in Delhi. This is something Modi told me he believes in and he really is doing it, I’m pleased to say.
The process requires simplification so that all the states can ‘talk to’ each other economically and financially without the interference of bureaucrats and regulations at the centre, which is what is keeping the brakes on the economy right now. Bansal puts it graphically:
‘Currently, supply chains for e-commerce companies are not optimised but distorted by regulatory cholesterol that prevents us from offering customers the lowest cost or fastest delivery. We are unable to supply goods worth more than Rs 5,000 [$75] to [the state of Uttar Pradesh] because our customers have to go to a tax office and complete paperwork. We are unable to keep goods from our 90,000 suppliers in our warehouses across Karnataka due to double taxation. We often face confiscation of goods and cash in Kerala because of their approach to tax domicile, which conflicts with supplying states.’
The whole of India suffers under this localised – but centrally inspired – insanity: the ‘octroi’ taxes, which must be paid whenever a truck driver with a load crosses a state line, for example, means that at any one time half of India’s fleet of haulages vehicles is parked up uselessly and inefficiently to avoid fees which are extortion by any other name.
Soon, however, the uniform Goods and Services Tax, or GST, as I have talked about before, will unleash a revolution of rationalisation across India that will start a bonfire of the old inefficiencies. It won’t happen all at once and a lot of horse-trading is going on between states that want sources of revenue and personal interests protected; but the GST is coming and it will improve economic life – ease, profitability, efficiency and innovation – beyond India’s wildest dreams over the next few years. What they have at the moment is vestigially medieval (‘octroi’ is actually from ancient Roman usage!); soon the avenues and watercourses of commerce will be swept and dredged in ways unimagined until recently. Read Bansal’s article: it really is very good indeed.