Demonetisation and the likely “short term” impact on the OVERSEAS EDUCATION demand from India.

I have been seen arguing in favour of steps to curb black money but at the same time have been critical of the way demonetisation was implemented. I have also stated that the likely benefits of demonetisation even in curbing black money, fake currencies or financing of criminal activities is largely overstated. However I am no economist and will want to be proven wrong.

This blog is my musing on the likely impact on the number of overseas bound Indian students.

Firstly let us consider two key drivers for OVERSEAS EDUCATION DEMAND:

  1. A guesstimate is that 90% of Indian students choose OVERSEAS STUDY as a PATHWAY TO WORK OR SETTLE OVERSEAS. They do this because they find limited opportunities in India and it has been seen that overseas education ultimately benefits the livelihood of their families even in India as large numbers do send back money once they are earning and the net inflow of forex into India over the student’s lifetime is far in excess of the outflow at the time of the overseas study.
  2. It has also been suggested that the fierce competition for limited number of places in “quality” Indian Institutions drive students to consider similar or better quality Institutions overseas where admission can be easier and thus suit students who have had an all-round education through school or college.

Now let us consider some “real” ways through which OVERSEAS STUDY is funded:

The cost of overseas education can vary from ₹ 15 lakh to 1 Crore “per annum” depending on where one studies and the program of study.

  • There are families that prioritise investment in their children’s education and many also have family savings over the years.

However most such savings are invested into property, shares/mutual funds, gold or fixed deposit till they are required. It is common for parents to encash them prior to the lodgement of the visa.

  • The property prices have increased significantly. Even village land in certain regions have suddenly seen an increased value with cities expanding into outer areas and land that is closer to highways. Look at the land prices in NCR especially and along the highway up north of Delhi.
  • The returns from such properties(after sale) is often partly in cash. It is a fact that over years, access to funds by way of families selling property or taking easier education loans against property is contributing to about 70% of funding of overseas education.

Funding for overseas education through black money also can’t be ruled out.

  • To camouflage this, students have been known to take education loans for visa purposes but actually use “other funds” to pay tuition fees or living expenses. Recent expose by Immigration NZ that I have detailed in my previous blogs indicate that there have been large numbers of students who have demonstrated an education loan for the visa but have not actually got that disbursed later or even if disbursed, they have not utilised the loan beyond the first payment. The sole reason for taking the education loan is that the students are not able to officially demonstrate “other funds” available with them.

So what will be the impact of demonetisation of ₹ 1000 and ₹ 500 currency notes on the demand and funding of OVERSEAS EDUCATION:

In an ambitious move to crack down on stock of illicit money (referred as Black Money), India announced on November 8th, 2016 that existing large-currency bills will no longer be valid, starting at midnight. This is being referred as demonetisation. A process to exchange the currency notes after due declaration was notified.

It is expected that in the short term (or maybe medium term), the economy may slow down.

By Swaminathan S Anklesaria Aiyar, Economic Times Bureau | Updated: Nov 23, 2016, 07.58 AM IST

The finance ministry is reported to have projected a fall in GDP growth to 5.5% in Q3 (the October-December quarter) against 7.2% in the same quarter last year. It hopes for a recovery after that. But world-class economists in investment banks are coming up with darker projections. With every day of detailed analysis, the mess looks bigger, and projections get darker. Initial projections of a fall in annual GDP of maybe 0.4% are now increasing to 1-2%. Hence, foreign institutional investors have pulled Rs 10,000 crore out of the stock market.

The darkest projection comes from Ambit Capital, which predicts that GDP growth in Q3 and Q4 will slow to just 0.5%, and may even turn negative. That would drag down GDP growth in the whole financial year to 3.5%, less than half the previous year’s 7.5%.

Less Black, But More Red

This implies a recessionary plunge. Ambit Capital thinks the adverse effects will continue into 2017-18, with GDP growth of no more than 5.8%.

Remember that the Great Recession after the collapse of Lehman Brothers cut India’s GDP growth from 9.5% in 2007-08 to 6.7% in 2008-09, with a recovery to 8.6% the next year. Ambit Capital is now projecting an economic dip much sharper than in the Great Recession, followed by a weaker recovery.

I think Ambit Capital is being too pessimistic. But nobody really knows. Given ‘jugaad’, I suspect people will find ways round their problems, and GDP growth may decline 1%. But even that means Rs 1,50,000 crore gone.

High-value notes account for 85% of all notes, equal to 10% of the money supply. Freezing such a huge proportion of money stock has been a massive shock to both consumption and production. It has dislocated activity in rural India, which is cash-based. It has wrecked value chains (from raw material producers to retailers) across all small business, which is overwhelmingly cash-based.

The stock market crash and worry about high-value notes have created a negative wealth effect. Elites feel poorer and so are spending less on highvalue goods, including cars, with knock-on effects on tyres and auto parts.

Demonetisation has shrunk demand via the money supply. Optimists thought shrinking demand would reduce prices. But since transporters are semi-paralysed, big local shortages have risen. Dilliwalas complain of higher prices for cement and steel, even as cement and steel companies crash in the stock market: both producers and consumers are losers.

Non-banking financial companies (NBFCs), which finance small businesses, face huge non-payments of up to 50%, and are in shock. The Reserve Bank of India (RBI) has relaxed its norms for recognising bad loans. But NBFCs fear this may actually induce borrowers to stop payment, knowing there will be RBI forbearance.
The shortage of new currency notes may ease by December-end. But the economic effects will surely spill over into the next quarter, and maybe the whole of 2017.

Hitting black money has hit real estate, a legendary black money haven. But this has multiplier effects on the demand for steel, cement and other building inputs, with ripple effects on transport and housing finance. Employment data show that between 2004 and 2011, construction was the overwhelming source of additional employment. Agriculture and industry provided few additional jobs. This high-employment sector has been dealt a body blow.

Nor does it guarantee that black money will be eliminated from real estate. The new Rs 2,000 notes and gold coins may well take the place of Rs 1,000 notes in keeping real estate black.

My gut feel is that like the construction industry and for the very drivers for overseas education that I have stated at the start of this blog, the move to reduce the money supply is bound to affect the funding of overseas education in short term.

However there is also another aspect of demonetisation that might just work in neutralising this affect. It is expected that with banks suddenly being flush with funds will lower the interest rate for education loans and thus more will take education loans helping the demand for overseas education. I am yet to see a linkage between the interest rate for education loans and the quantum of education loans being taken. It may be true for housing loans but for education loans, the student who wishes to study overseas simply goes out and takes the education loans either genuinely or to demonstrate the availability of funds while may still pay the fees and expenses from “other funds”. Such students are not so concerned with the interest rates. I have heard of students borrowing funds for overseas education sometimes from non-banking sector for short term on interest as high as 3-4% per month.

Now the above impact can be only true if the move to demonetise the larger currency notes puts an end to the availability of “other funds” in the market “for good”.

  • The general feel is that the move may have an impact in short term though in medium and long term, the “other funds” will return. The move has only impacted the stock of black money and not the flow of black money. The new ₹ 2000 notes and gold coins may just take the place of the demonetised ₹ 1000 and ₹ 500 notes and it is already announced that new ₹ 1000 and ₹ 500 notes are also being introduced.
  • Also there is an inverse correlation with state of economy to jobs in India. With slowing of the economy expected to reduce new job openings in immediate term, there will be a greater desire to gain a qualification overseas as a pathway to work or settlement overseas.

Thus in conclusion, I expect an impact on demand for OVERSEAS EDUCATION from INDIA in short term but in medium to long term, there will not be any impact.

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