The bad news is now an unending scream. From the newspapers, the television channels, the hushed office talk of layoffs each month—20 people at a time. From home loan rates that reached 13-14% last year and are yet to fully come off. From our investments that are down horribly, and in the pay cuts that some of us have had to digest. And the anticipation that increment time March brings is muted. The question all of us wish we had the answer to: How much worse can it get and should we really be worried in India?
While most news that we read and view is macro in nature—inflation numbers, gross domestic product (GDP) growth numbers, deficit data and market index movements—the “me and you” is often missing from it. So we’re left with this nudging unease. And the thought is pushed out. For the next breaking news on television or the newspaper the next morning. Understanding the macro and viewing our finances in the context of those of the country and seeing how deeply we are linked with wider events may not help ease the pressure, but can make us feel more in control. Three macro terms currently being tossed around—fiscal deficit, revenue deficit and GDP slowdown—actually do affect our money lives. Always a good idea to decode what affects us.
A revenue deficit is just like the credit card debt that you or I run up. It is the money the government borrows to fund current expenditure. So if you are overdrawn on your card for money spent on an electronic gadget, a foreign holiday and branded clothes, you are in the same situation as the government that has 4% of GDP as revenue deficit. Would you have worried a year-and-a-half back about this card debt? No, as a nation we were confident of our ability to not only continue earning what we did, but incrementally increase that year-on-year (y-o-y) for the rest of our lives. Hence the splurge.
So did the government, thinking that the five-year run, which ended last year, of a 26% y-o-y growth in tax revenues would be sustainable. Well, both made an error. But while we will have to pay or the goons will come calling, the government will finally have to find the money to bridge this deficit. A large gap between income and expenditure makes for an unstable household. The country is no different. And guess who will pay for this? Yes, you, me and our kids, through both direct and indirect taxes, for many many years to come.
So, am I saying that all borrowings are bad? What about that home loan? This is where the fiscal deficit comes in. Borrowing to build an asset that does not depreciate, such as a car or a gadget, is not frowned upon; in fact, the Financial Responsibility and Budget Management Act is happy with a fiscal deficit target of 3% of GDP, if the revenue deficit is zero by 2010. This means that if you have zero credit card debt and no personal loans, it is OK to take a home loan and leverage your future income today to build an asset. But with the real fiscal deficit at around 10% of GDP, with a bulk of it as revenue deficit (credit card debt), there is clearly trouble ahead.
If you are staring at the face of two home loan equated monthly instalments (EMIs), two car EMIs that had built in the next 30% increment, and you are suddenly faced with a salary cut, you know what is happening to India at a macro level. While you will have to cut expenses, sell assets, get the spouse to go to work, the government does not have the option to cut expenses just now or raise income by increasing taxes due to the slowing GDP growth that the International Monetary Fund says will hover around 5%. In fact, to crank up demand, the government is actually increasing its spending and cutting taxes. This it does in the confidence of an option that you or I don’t have, that is the option to print money (monetize the debt). But that will lead to inflation—something the government does not want. The one option open to both us and the government is to sell assets to bridge the gap. That decision is a political one and will have to wait for the next government to get in the saddle.
What is clear is this: there is yet more pain ahead. The pick-me-up drugs are being administered—interest rate cuts, excise and service tax cuts—all to get us to spend more and industry to invest more. It will finally work, but the momentum of growth that India had built up over the past decade is lost. It will take us years to get the flywheel spinning again. Could it have been different? Like the family that conservatively retired debt, did not upgrade lifestyle overnight and built some assets, India could have had a softer landing. But we did not. So, tough times ahead. Watch this space on how to ride the next couple of years.
Monika Halan is a certified financial planner and policy analyst in the area of financial literacy and intermediation.
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