Re-monetisation of Indian Rupee

Not that easy to disrupt the black money. 99% of the cancelled Indian banknotes are now accounted for. But did the side effect of demonetization result in more digitization?

Indian currency in circulation
Fig 1. Total Indian Rupees in circulation (The Economist, Sep 2nd, 2017). Big dip is due to demonetization, but still lower than a peak of Oct 2017 due to several efforts by government to discourage cash transactions.

When the Indian government cancelled the high denomination notes on Nov 8, 2016, one of the goal was to get a quick windfall from money that won’t be returned. And it made sense. Those hoarding cash had to bring it back and explain their source. High net worth income individuals and Indian wives, famous for keeping their cash under carpet, were not expected to return a significant part of their hoard. The government planned to re-print these missing notes & count them as their own money, allowing it to indirectly transfer this ‘black money’ from hoarders to the Indian taxpayer.

However, the Reserve Bank of India reported on Aug 30 that 99% of the notes have been received back. The RBI annual report (page 195) says that 15.28 trillion rupees ($241 million) out of the 15.4 trillion rupees withdrawn from circulation have been returned back to the banks. The original expectation was between 3 and 25%, thus giving the government a big windfall. Either people didn’t hoard large cash, which is highly unlikely for a cash based economy, or they managed to return it back despite careful monitoring by the government.

This demonetization effort was heavily criticized by experts and resulted in big pains for the Indian consumer and economy. Businesses came to stand still for months while people lined up at ATMs to withdraw their minimum daily cash allowance.

One of the key outcome of this exercise was the strong focus on digitization of the Indian economy. The government launched several efforts to make the economy less dependent on cash. The data below gives an assessment of how these efforts have fared. The percentage growth is impressive, but the absolute numbers are still pretty low.

India digital payments
Fig 2. Total annual transactions in Billion Rupees ($1 is about 65 Indian Rupees, Sep 2017). Despite continuous growth, the overall numbers remain pretty small.

Looking at the total paper transactions, there is a steady drop of about 5% over last two years. The retail electronic transitions have almost doubled in past two years suggesting businesses are more open to accept electronic payments. However, the credit card payments are still pretty low, almost 5% of all known retail transactions.

Indian economy is highly unregulated and these numbers from RBI tell only a small part of the full story. Majority of Indian consumers shop at small mom and pop stores that buy their goods from larger wholesale stores, which are in essence dealers of large corporations. This supply chain, developed by the large manufacturers & multinationals, is strangely very efficient in delivering good. But most transactions are cash based & rarely use a paper trail of documentation. Therefore, majority of transactions do not appear in any reports. Government’s efforts to digitize the economy not only provides a proper documentation of these transactions, it brings them to the wider tax system. However, India is still a long way from anything close to developed economies like US or Europe.

There are few dramatic changes going on for Indian consumer. The recent surge in e-commerce has penetrated deep into India including rural markets. Heavy competition between Amazon & local giants like Flipkart & Snapdeal has benefited the average consumer. Additionally, the growth in smart phones and 4G internet, led by Reliance Jio, has connected a large number of consumers to global market although their purchasing power is nowhere close to western economies or China. To paraphrase Jack Ma of Alibaba: the biggest story of previous century was selling to US consumers; this century will be about selling to China. Very soon, this story will include India. And market forces will decide this future growth despite government cameos like demonetization and Digital India.

Worth of an investment – comparison of cash, housing & stocks

See today’s Chart of the day here.

Value of different Investing vehicles

Value of $100k invested in Jan 2010 in cash, housing, and S&P Index at the end of Jun 2017 (see more details of this chart at Chart of day, Aug 14, 2017)

In Dec 2013, we made an offer of $345k on a house in Washington County, Portland Oregon. The state of housing market was still in limbo & any desperation on the seller’s end would make the buyers run for the door. Haggling, intense negotiations & freebies were at buyer’s disposal and any seller making counter offers would end up paying many more months of mortgage on houses worth less than their loans. Such was the state of housing market that the deal fell through for a relatively small amount of $5k. In the end, the house was sold to someone else, at the same price we offered.

Today, after three-and-half years, Zillow shows the same house has appreciated to $460k. That’s an impressive gain of $115k, a 33% increase and about 1.75 times the median annual earning of a household in Portland Metro (link). Suffice to say, such opportunities in housing market are not seen in last few generations.

My interest here is to make an economic & personal assessment of this lost opportunity. And to find out if it was really a lost opportunity.

Other investment options

The S&P stock market index in mid-Dec ’13 was approximately at 1800, today the number is 2440, a 35% increase. Barely two years in the job, the down payment we could make was the standard 20% or about $70k.  Instead of buying the house in cash, if one had invested in an S&P index, the gains would have been about the same. If invested in the tech stocks through Nasdaq the gain would have been 50%. Nasdaq was at 4150 in Dec 2013 and now in Aug 2017 it is at 6250, a 50% increase.

So investing in Nasdaq or S&P would be a better deal? Not really. Our investment into these index funds would have been the 20% down payment, that’s $70k. So instead of earning $115k, the gain from stock market would be 35% of the down payment, approximately $25k. To simplify: the gain on the house would be for the entire asset of the house although you pay only 20% for now; however, the gain in stocks is from whatever you invested.

What if you decided to not pursue either of the options and just kept it under the carpet? Inflation, or the rate at which your money depreciates has varied between zero and 2.7% over these three and half years (link). The average rate calculated over this period is about 1.2%. Therefore, the purchasing power of the initial $70k will be about $67k today. If you were to put this money in the bank, the returns are few hundred pennies, small enough not to make any dent into what’s been eaten by the inflation. And you will need to pay some of these pennies to IRS while its worth is depreciating.

How about the cost of renting? For a two-bedroom, two-bath apartment in the same area, average rent has been approximately $1.4k or $17k per year–although it has risen substantially (link). This adds up to about $60k over three and half years. The monthly mortgage payment at 4% on a 30-year mortgage (link) in combination with property taxes, HOA and the tax breaks comes about the same as what we have paid so far in rent. So with the house, gains would be the equity buildup and the appreciation of $115k.

Doing precise calculations for rent vs buying is flabbergasting. There are just too many variables, and each house and every family will add their own. So an assessment by first principles that we see for this case shows rent vs monthly mortgage are about the same. However, the equity build up–although low in first few years–and price appreciation would be the biggest factor to support owning the house.

Personal side of buying a house

There is a personal side of this discussion that is often ignored, mainly because it is hard to quantify. In majority of cases, buying a house is a very personal decision and depends upon the family’s state of mind. This is for multiple reasons. If you have a family with kids, a house provides a very stable foundation to put your roots. It instills a certain sense of belonging from very early age. Just ask anyone who moved a lot in their childhood and they will tell you their loss of belonging. Living in a rented community does help build a sense of community, but hinders the children from taking creative steps they would be taking while growing up in their own home. The freedom to paint the walls, stick papers, hang paintings, and decorate the ceiling are priceless.

The other personal side of buying a house is not so rosy, as the house does put you in a bind. Unless you plan to stay around for long, going through all the paper work and the non-refundable fees and then giving away a part of your sold-dollars to the agents is certainly not worth the trouble. The extra space requires regular cleaning, maintaining, and a good budget to decorate & furnish. Putting the roots down will have added disadvantage of skipping that next big opportunity, somewhere outside the current job. In the long run, it will stunt your overall growth. Believe or not, employers know it. It is common to see managers openly discussing people who are flight risks. The first sign of someone being on that list is a long time renter. Anyone doing well but not buying a house will be lured with extra benefits to continue & contribute, signs of a promising career & better future.


In the end, there are two sides of this decision. The main motivation of building an asset through purchasing a house is getting harder and harder as prices keep rising. The once-in-a-lifetime opportunity to build solid gains with a house is behind us. Making the decision based on personal reasons will be more fulfilling. If you spend most of your time around kitchen & living room, buying a big mansion will make you unhappy in the long run. But if you plan to raise a family with memories of their own no price is high enough.


Summary of Portland housing growth – in 6 charts

Last updated Aug 3, 2017.

See today’s Chart of the day here.

Figure 1. Lot of upswing.  US home price change (in percent) for top 20 cities for 2011-2017 (Click to enlarge). Key summary: (1) After the worst year of 2011-2012, a huge upswing in 2012-2013 across the country; (2) Best gains are in South-West SF-LA-Phoenix-Vegas corridor; (3) While US National growth has stabilized at about 5%, Pacific NW regions of Seattle-Portland and Denver-Dallas are still growing at almost 10%. This data is compared for month of May for each year (all other data below are for month of June). The data is available from several sources including S&P US IndicesZillow, & Federal Housing Finance Agency.

Figure 2. Still got momentum. Home price change (in percent) by zip-code in Multnomah county of Portland Metro, OR-USA (Click to enlarge).  Key summary: (1) Almost no price drop in 2011-2012, similar to other metros; (2) however, highest growth was in 2015-2016 instead of the nationwide peak growth in 2012-2013; (3) not a very strong correlation between price change to actual price (x-axis is plotted to show current house prices in ascending order, from left to right); (4) the most expensive neighborhoods (on the right side) had already started to appreciate in 2011-2012 & are still growing; (5) mid-price range neighborhoods have almost peaked & growth is <5%; (6) As prices increase, people are forced to buy in low-cost neighborhoods (left side on x-axis), and therefore those are growing at almost 10%.  Data from Zillow (which unfortunately does not include all zip-codes), raw data here. To see the actual home prices by neighborhood, see Chart of the day, Aug 1, 2017.


Figure 3. Growing growing growing. Home price change for Washington county, Portland Metro (this region includes the high-tech corridor of “Silicon Forest” with Intel, Nike, and coveted neighborhoods of Bethany & Skyline, Click to enlarge). Key summary: (1) Not as explosive growth as Multnomah county, but consistently growing at 10-15%; (2) as seen for Multnomah county, not a very strong correlation of growth to actual prices (house prices increase on this chart from low to high on x-axis as we go from left to right); (3) again, the most expensive neighborhoods (on the right side) had already started to appreciate in 2011-2012 but still growing; (4) lower priced neighborhoods (left side) are still growing more than the expensive ones (right side); (5) the Cedar Mill area (that includes Bethany & part of Skyline) is anomalous: it includes some of the best schools in Oregon & is preferred by the immigrant population working in the high-tech corridor; prices didn’t drop in 2011-2012 but growth is low due to extensive construction & already high prices; (6) strong growth in the outskirts & previously untapped neighborhoods of Aloha, Forest Grove, Banks, North Plains & Hillsboro; you can drive over and see once-in-a-lifetime generational change & inequality in action: low income families being pushed out by new construction boom and young, highly educated families moving to newly developed communities; the State of Oregon is working hard to bring more business & majority of it is moving to Washington county. Original data from Zillow, and raw data here. To see the actual home prices by neighborhood, see Chart of the day, July 31, 2017.


Figure 4. See you on the other side. Home price change (in percent) by zip-code in Clark county, Washington state (part of the Portland Metro, on the north side of Columbia river. Click to enlarge). Key summary: (1) Much more affordable due to lower cost to buy, lower property taxes, lower closing costs, no income tax in Washington state & better schools than Oregon; (2) across all neighborhoods, a consistent 10% growth except 2011-2012; (3) only reasons holding back are heavy rush-hour traffic to cross the Columbia river & Oregon state tax for people working in Oregon; however, lot of new businesses have moved here recently, especially financial firms including Fisher Investments that has helped raise the median household income. Data from Zillow and raw data here. To see the actual home prices by neighborhood, see Chart of the day, Aug 2, 2017.

Figure 5. A study in contrast. Home prices change (in percent) by zip-code in Clackamas county, OR. This county includes the affluent neighborhoods of Lake Oswego, the beautiful Columbia River Gorge, the high-tech area of Wilsonwille, and part of Willamette valley (Click to enlarge). Key Summary: (1) This is one of the most economically diverse regions and affordable neighborhoods are still growing over 10%; (2) the sought-after area of Lake Oswego is comparable to downtown Portland & therefore growth has been comparable to Multnomah county; (3) the high-tech area of Willsonville has not seen growth comparable to Washington county therefore growth has been sluggish. Data from Zillow and raw data here.


Figure 6. In the middle of action. Home price change (in percent) by zip-code in Marion & Polk counties, OR. These include the state capitol & the agricultural communities of the beautiful Willamette Valley. (Click to enlarge). Key summary: (1) Very different growth trajectory than the Portland Metro area; the area was hard hit during 2011-2012 but has slowly recovered and is seeing the best growth right now; as Portland Metro grows out of reach, more people are moving to these affordable neighborhoods; (2) most of the region is over an hour drive away from Portland Metro, making the high-tech growth inaccessible; (3) most likely jobs are related to agriculture, administration, health & medicine & tourism, thus the different growth trajectory. Data from Zillow and raw data here.


The bold new plan of building Amberglen neighborhood in Hillsboro

Last updated Aug 1, 2017.

Amberglen Community, Tanasbourne, Hillsboro, OR USA

If you were to believe the Hillsboro Planning Dept, the Amberglen Community in Tanasbourne will be Orenco Station 2.0 with big plans for development. Here is map of the area. A list of key projects below.

Key development items:

  • Amberglen Central Park, with nearly 15 acres of beautiful landscaping & water fountains, was recently purchased by Hillsboro Parks and Recreation
  • A new 5-story, 136 room world-class Aloft hotel is now open for service
  • 396 unit apartment complex, Amberglen West, recently completed & is now fully open
  • A retail plus residential property, Amberglen at the Park, with 277 apts, 338 car stalls & 252 bike spaces is slated to open by end of the year
  • A 203 unit Apt complex, 206 Apt, opened last year
  • A 237 room Oxford hotel is approved & will be coming up soon on Cornell & Aloclek
  • A new 140 room hotel by Kalyan Hospitality on Evergreen Pkwy, next to Kaiser Permanente is approved, which will be part of the 950 units increase to Hillsboro’s hotel inventory
  • The owners of Boom Fitness are building a new apartment complex next to the facility
  • If you read the full plans, there is even a Max rail planned for future
  • Want to know how it might look like, try these reports from University of Oregon & REIG

A bigger picture:

What Portland is driving? – Part II (long read)

Here is a long read for those more involved. This post discusses the detailed analysis of data collected from about 4000 vehicles in Washington County, Portland, OR in mid-July 2017.


Figure 1. Slice of the Pie. Market share of top 25 companies in the Washington County based on this study. GM and Ford may be leading the most recent sales numbers but they are far behind in numbers of cars on the road. Did Toyota & Honda sold more in the past or they just last longer?

About a year ago, I spent $15,000 to buy the stocks of GM and Ford. My rational was that US automakers had historically lowest Price-to-Earning ratios (with Ford at 6 and GM at 7), and they had nowhere to go but up. 12 months later, and with S&P at 20% high, that optimism is all faded away. To understand why things are so bad, I didn’t have to look farther but to go out & see how things really looked in Portland. The auto market is booming, no doubt. But things are gloomy for the US automakers.

Short summary:

  • The data from this study show that every other vehicle on the road is Japanese! Every time you hear the sound of a car or truck, more than half the time it will be one of the Japanese brands (Toyota, Honda, Subaru, Nissan or Mazda). And in most likelihood it will be a Toyota or Honda (every 3rd one).
  • If you hear a truck/SUV/Van, it can be anyone of these with almost same probability: Toyota, Ford, Chrysler or GMC; but chances of a Toyota is still higher than anyone else.
  • A luxury car will most likely be a German brand; and most likely a BMW, double the chances of Mercedes or Audi. Sometimes it may be a Lexus or Acura but if you see a Tesla, take a good look as you won’t be seeing another one for a while (1 in 70 luxury cars, and 1 in 200 vehicles of any kind)
  • The market share for top three US automakers (GM, Ford, Chrysler) is only about a quarter (1 in 4 vehicles)
  • Although VW was the world’s biggest auto manufacturer in 2016, it’s share is negligibly small (less than 1 in 20 vehicles)
  • Subaru (a Pacific Northwest darling!) is about one in six vehicles, despite not appearing in the top 20 global manufacturers.


Figure 2. See no evil, just Kaizen. Total number of vehicles by top 25 brands separated by different types. Toyota leads in every category except EV where the Nissan Leaf has been selling more than any other EV. The US automakers are heavily reliant on their SUVs & Trucks. And as a foot note, Mitsubishi called it quits to focus somewhere else.

Figure 3. Upstairs downstairs. Same plot as Figure 2 separated by Luxury and non-luxury brands. BMW outsells everyone else but recent efforts by Mercedes has started to attract the younger crowd besides all those ML350s. Tesla is now more valuable than Ford and GM on wall street, but not to be seen on the roads yet.

Figure 4. Lineage. Data consolidated by parent company. Not much change here except the Hyundai-Kia combination does bump them above the lower volume players.

I hear that in Detroit they are trying to show they can match the might of Silicon Valley by appearing cool. But it’s a long road to see anything meaningful. For now, I will have to be content with the 5% dividend they offer.

About this study

The data were collected mid-July 2017 over a period of two days in Washington County, Oregon. Six different locations were selected in Hillsboro & Beaverton. This ‘Silicon Forest’ area has several high tech employers requiring a diverse set of skills and therefore a wide ranging earning power. Additionally, people drive from across the Portland Metro area to these companies and therefore should reflect the overall vehicle ownership pattern of the whole area. The data were collected from 9-5 pm during the workweek to avoid any aberrations related to traffic patterns, weekend driving patterns, re-counts due to driving in and out of the area or any potential influence of purchasing power from number of hours worked.

The raw data is attached.

Portland-auto-survey-raw-data (.xls)

Portland-auto-survey-raw-data (.csv)