Inverting The Pyramid

Category: Off track!

  • #ChatGPT & Sovereign Gold Bonds (SGB)

    Sovereign Gold Bonds (SGBs) are financial instruments issued by RBI that allows investors to buy gold in a paperless form. They are denominated in grams of gold and are issued in multiples of one gram. The primary purpose of SGBs is to reduce the demand for physical gold and encourage people to invest in paper form instead.

    One of the main advantages of SGBs is that they offer a safer and more convenient way to invest in gold. Unlike physical gold, SGBs are not subject to the risk of theft or loss. They are also easier to sell and can be traded on stock exchanges. In addition, SGBs offer a fixed rate of return, which is determined by the government at the time of issue. The current rate is 2.5% per annum, which is paid semi-annually.

    Another benefit of SGBs is that they are exempt from capital gains tax on redemption. This means that investors do not have to pay any tax on their profit when selling their SGBs. This is a significant advantage, especially in a country like India where taxes on capital gains can be quite high.

    SGBs are also attractive to investors because they offer a combination of both gold and debt. On one hand, they provide the security and stability of gold, which is considered a safe haven asset. On the other hand, they offer a fixed rate of return, similar to a debt instrument. This makes them an appealing option for investors looking to diversify their portfolios. It is important to note that SGBs are not the same as physical gold. They are simply a representation of gold and do not have any intrinsic value. This means that the price of SGBs is dependent on the market price of gold, which can fluctuate.

    In conclusion, Sovereign Gold Bonds are a convenient and tax-efficient way for investors to buy gold. They offer a fixed rate of return, are easy to sell, and are exempt from capital gains tax. While they may not have the same intrinsic value as physical gold, they offer a combination of gold and debt, making them a good option for diversifying a portfolio.

    What you read above is entirely written by #ChatGPT when asked- Write me a 300-word article on Sovereign Gold Bonds. There were 2 factual errors, which were edited out. Still, it makes a fantastic concise piece!

    Later I asked #ChatGPT to compare Gold prices against Fixed Deposits over the last 20 years, which it couldn’t and so here comes the human part.

    This product was launched by RBI in 2015 and since then has been offered multiple times over the years. Latest of which concluded on December
    23, 2022.

    SGB Data

    The question is, does SGB make a good investment?  I will answer this by
    comparing it against Fixed Bank Deposits (FD). So in case you aren’t invested
    in SGBs and hold FDs, do yourself a favor and read on.

    Since SGBs are intrinsically linked to Gold price, of course it is subject to market fluctuations and unlike FDs, might even deliver a negative return in certain years. FDs do deliver a guaranteed positive return but that statement is only valid if we are naïve to ignore inflation and only look at the nominal return instead of real return. If you subscribe to the macroeconomic idea that INR will keep depreciating against USD over longer periods, till there is an Inflation differential between the two economies. This return because of currency depreciation is in addition to any appreciation of Gold price (quoted in USD). To validate this, I looked at data for the period 1985-2022 and this is how it looks-

    Historical

    So Gold & SGBs in particular offer a better return over FDs. But is it enough of an incentive to subject yourself to the uncertainty vis-a-vis FDs? That’s a question one needs to evaluate based on investment goals and risk appetite.

    Now let’s do a comparison over a similar period. Since SGBs are an 8-year investment (there are options to exit before that but you lose on the tax benefit). Let’s look at the returns on both assets over rolling 8-year periods during 1985-2023.

    8 Year period

    You will see that out of 30 such periods, SGB emerges as the winner in 22 periods! That’s as good as an odd we can get. Also, SGBs on average return 75% higher over FDs over these 8-year periods. Now that’s a fantastic return and should be reason enough to persuade you to a reasonable allocation to SGBs over long-term FDs.

    Now some nuances for the nerds:

    1. The FD rates taken for comparison are average FD rates for 5-year Deposits by leading 5 Banks in those years. Source: RBI website
    2. Tax payable on interest income is assumed to be 20%. Which depends on your tax bracket. A higher tax rate is an advantage to SGB.
    3. Interest rate on SGB is considered @2.5%, even though it was 2.75% for the first series.
    4. You may download the excel files here (Historical Data- SGB) and tweak the nos as you please. 
    5. SGBs do not pose a reinvestment risk unlike FDs, depending upon the FD tenor you actually get from your bank.
    6. SGBs are an excellent tool if you want to take exposure to long-term currency depreciation (INR).

     

    P.S.: I agree the title of this post was somewhat misleading (#ChatGPT) but at least it got you to read, what otherwise would have sounded drab to start reading. Who wanted another post on SGB after all!

  • e-Rupee (e₹) or e-RUPI? (e₹UPI)

    Not being a wordsmith and these 2 are very different things! Short note on what’s what.

    So, first e-Rupee or e-₹; this is what has been the talk of the town for over a month now. Simply put, it is India’s CBDC (Central Bank Digital Currency) launched by RBI, which is currently undergoing its pilot. {If you still wondering what is that, welcome to the blog and may I implore you to go through last few posts here. I beleive, that will be sufficient for you to gain a decent undertsanding of e₹. }. With e-₹ out of the way, what the hell is e-₹UPI!

    Continuing with our long national tradition of creating clutter as much and wherever possible we have done it again! Jokes apart and to be fair, there wasn’t much room for having a better nomenclature for these 2. Anyways, this Seeta-Geeta business has got more than a handful mixing the two and serving it to people. The very reason I wanted to write on this, was because a few days back I came across this on youtube- https://youtu.be/My5pXiDCtU0 from Mr. Akshat Shrivastava. Great channel, superb content, and 1.35 mn Subs on Youtube alone! 10 days later this video has 304K views and 1500+ comments appreciating the content. The only hitch is that he has got it wrong, confusing e₹UPI as India’s CBDC.

    Don’t get me wrong, I love his content and general take on life but this was a reason enough to make an effort to limit the misinformation. Enough digression, back to the subject.

    e₹UPI was first announced by Prime Minister Narendra Modi on 2nd Aug 2021. Long before the e-Rupee (e₹) came into being.

    So what is e₹UPI? It is something which is intended to bring efficiency to Direct Balance Transfers (DBT) by the goverment. IT uses the UPI infra and hence the name e₹’UPI‘. Below is a simple 6 stage flowchart of how it will work.

    (Ignore the colours, they don’t denote anything)

    The process will start with a government, ministry, or department coming on board as a sponsor for a program. Let’s assume, the Dept of Basic Education for Uttar Pradesh decides to adopt e₹UPI for distributing the money they spend on each student to provide them with Books for each academic year. The department will provide the details of all such student beneficiaries, along with a mobile number, amount, validity, approved vendors etc to the Bank. The Bank’s portal integrated with NPCI, will issue SMS based, UPI-prepaid voucher to each beneficiary. Upon receipt of the voucher, the student can only redeem it at a pre-approved book-seller in the area.

    This is how it is working in the current phase. However, it is expected that in the next phase it will allow for easier vendor selection/appointment and might open up a wider set of institutions to come on board as Sponsors. Imagine a private sector employer wants to reimburse its employees for certain healthcare expenses (eg: COVID vaccination). While the employer doesn’t want to go through the hassle of processing reimbursement but at the same time has to reasonably ensure the money is not spent for other purposes. Such an employer can come on-board e₹UPI and issue vouchers to its employees, who can only redeem their vouchers with Hospitals in their city. It has certain limitations in its current form but I think its benefits far outweigh any limitations. More on this in the next post.

    Basic differences between the two

  • The Land of Darkness

    This story is from the land governed by narcissists, it may be true for few other states of the country as well, but I speak for the one I have firsthand experience with. Country’s most populous state and in what state! ; The account here is from the eastern most part of the state, where overwhelmingly large part of the population is dependent upon agriculture for their livelihood.
    In the present when we as a country boast a stupendous record of an impressive GDP growth rate year after year for close to one decade now, the situation here is quite disturbing. To my understanding, power is the ‘most’ important resource or growth enabler for growth, and mind you this power is not the power that the people of this land are more bothered about, this is the power that runs industries but as unfortunate as it is, people here are much more active about the power that a democracy like ours bestows upon the elected representatives. I think power is most important because other infrastructure will come in as and when the demand comes, but without power you would never see the demand come in.
    We often talk about growth for now forget growth, this district has seen degradation of basic infrastructure in the past. Till some 10 years back the average electricity supply was about 16hrs a day which has dropped to a near 12hrs a day, that is the kind of ‘growth’ we are talking here. The district even saw its MP rise to become the PM for a short stint, but all that to this consequence! Governments came and went while the district slowly and quite steadily slumped into worse states, while the representatives the people selected were busy building their own empires. Of course the people themselves are at fault, they themselves don’t know their priorities, otherwise how can one explain a political party that blows thousands of crores of state government funds on building parks with statues of animals (elephants & few others :-P..I wonder if you get the joke) still continue to run the government without any problem. That kind of money was big enough to lessen the power deficit the state has, not by a large quantity but intent wise would have been big enough. It’s amusing how such thoughtless, shameful projects are implemented so fast when the ones those are needed never see the light of the day.
    I know people who think its unimaginable to have long power cuts in summers, infact for that matter most of my Google generation doesn’t actually know what its like to live without power..an odd day’s power cut doesn’t even come close to what it’s like to live in a place which has electrification just for the sake of records. Have you ever wondered how would it be to live in such a place? Well right now I am in one such place, thankfully I am one of the very few fortunate ones around as we have all possible means of power generation, gensets, solar panels, invertors etc. but not all have access to such facilities, infact this district has a population of more than 30 lakhs which survives on an upto* 8 hrs of electricity supply a day! The kind of electricity that is wasted every day in lighting up these stone parks built across the state could very well be used to power many such villages in the same state.
    Some people in the towns are willing to pay any price to ensure uninterrupted supply, but not all can afford that. All this breeds resentment, people don’t pay electricity bills…in fact the number of legitimate electricity connections is very very low as compared to actual nos. The state power boards are sick, but this vicious cycle has to break somewhere. It’s no brainer to guess that the government can only initiate any such major shift of state, but unfortunately the political parties in power don’t have the political will to take steps like privatizing the distribution & billing of power at least. You can very well argue that privatization is not the end of all problems but I know one thing for sure, right now I have access to the internet(GPRS based), but no electricity!, thanks to the private telecom companies. Also, it is working great in most of the places and so I have no reason to think otherwise. Even in the power generation space Pvt. players are awarded projects but they face far too many hurdles unlike that in construction of parks across the state, strange isn’t it? What is more amusing is how these very electricity boards manage to provide almost 24hrs electricity supply in the same areas when elections are around the corner..Power of democracy! Isn’t it?? 🙂
    P.S: For record the place I am talking about is Ballia, Uttar Pradesh.

  • Mathematical Dilemma

    *It’s a hopeless situation when your happiness quotient is given by = ƒ(Someone else’s action or shud I say inaction). Only if it could be restored to = ƒ(my own actions)..(Can’t use an ! as it could be misunderstood for another mathematical expression!)

  • Just a Thought

    All our actions..every single one can be traced back to be driven by our own happiness, and the extent to which our happiness is intertwined to the happiness of people around is what makes us human!

  • *My convenient truth- people who matter understand, and the ones who don’t understand don’t matter!