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Friday, 09 July 2021
easynomics
A newsletter that demystifies complex economic jargon and explains how it impacts your everyday life
By Vivek Kaul

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Hello and Welcome to the first issue of the Easynomics newsletter.

The name of the newsletter is a combination of two words, easy and economics. But how can economics be easy? That is a question well worth asking.

Sometimes it feels like that people who understand economics are talking and writing about it in a way which simply obfuscates things for everyone else.

In fact, the British novelist John Lanchester captures this sentiment brilliantly in his book How to Speak Money: “On the radio or the TV or in the papers, a voice is going on about fiscal this and monetary that, or marginal rates of such-and-such, or bond yields or share prices, and we sorta-kinda know what they mean, but not really, and not with the completeness which would allow us to follow the argument in real time.”

While Lanchester is primarily a novelist, he has written two excellent books on economics and finance. The second one being Whoops!: Why Everyone Owes Everyone and No One Can Pay , which is a brilliant primer on the financial crisis of 2008.

In this newsletter, we promise to do exactly the opposite of what Lanchester writes about, which is, write about economics, finance and money issues, in simple English and try and address the straightforward question of how do major issues in economics impact the life of a common man and more importantly, what can be done about it.

So, what are we waiting for then? Let’s start.

In late June, the Reserve Bank of India (RBI), India’s central bank and the banker to the banks, released the household financial debt figures based on select financial indicators. Household financial debt is basically loans that you and I have taken from the formal financial system of the banks (both commercial and cooperative) and the non-banking finance companies (NBFCs).

Of course, there are other ways to borrow as well. One can borrow against gold as a collateral from a local jeweller or simply borrow from a local money lender or borrow money from friends and family, which is why, the RBI calls it household financial debt based on select indicators.

It needs to be kept in mind here that borrowing from the informal sources is perhaps easier but at the same time more expensive, given that the risk for those lending money is higher.

So, what does the RBI data tell us? In absolute terms, the total household financial debt based on select indicators has gone up from Rs 55.38 lakh crore to Rs 73.13 lakh crore, between June 2018 and December 2020.

Take a look at the following chart. It plots the household financial debt as a percentage of the gross domestic product (GDP) of India.

GDP is a measure of the economic size of a country. The question here is, why have we represented household financial debt as a percentage of the GDP, and not in absolute rupee terms alone.

The reason for that is very simple. As the size of any economy goes up, people will borrow more in absolute terms. And that doesn’t make any difference if the capacity to repay is also going up. But that is not always the case. To take this factor into account, it makes sense to look at the household debt as a proportion of the overall size of the economy and not just in absolute terms.

As can be seen from the chart, the household debt as a proportion of India’s GDP has grown dramatically between June 2018 and December 2020, a period of thirty months. Also, a significant jump has happened post December 2019.

The answer for this is obvious. The spread of the covid pandemic has hit many families the hard way. People have lost jobs. Incomes have been slashed. And families which have got Covid, have spent a lot of money in its treatment. They have also had to borrow.

Understanding the ‘average’

If we look at the average per capita income of India from April 2020 to March 2021, it fell by around 4%, in comparison to the period April 2019 to March 2020. What this means is that while the average income contracted during the financial year, the household debt went up.

Also, like all averages, what per capita income reveals may be significant, but what it hides is important. The per capita income of a country is the average of all the incomes in a country. It includes everybody, the richest and the poorest. What the per capita income represents is the average income of an Indian, not the income of an average Indian, which are two very different things.

Let’s say you have gone to attend a conference. Mukesh Ambani walks into the hall to give a speech. The average income of the people in the hall at that point of time goes up dramatically. But does that really mean anything? The income of each individual present in the hall continues to stay the same.

Once we take this into account and the fact that the rich have only grown richer since the Covid pandemic struck, it is safe to say that the income of an average Indian must have fallen by much more than 4%, while what he owes to the formal financial system has grown.

Now getting back to the point.

Dear reader, which category of loans do you think has seen the fastest loan growth? Loans against gold jewellery is the answer.

When it comes to banks, loans against gold jewellery grew by 82.32% between March 2020 and March 2021. They had grown by 33.95% between March 2019 and March 2020. Adjusted for the size of the economy, bank loans against jewellery grew from 0.16% of the GDP as of March 2020 to 0.31% of the GDP as of March 2021.

Also, banks are not the only financial institutions giving out loans against gold jewellery. Many NBFCs also specialize in giving out such loans. While a specific breakdown is not available, overall loans given by NBFCs grew from 2.5% of the GDP as of December 2019 to 3.7% of the GDP as of December 2020. In absolute terms, lending by NBFCs has increased from Rs 4.93 lakh crore to Rs 7.18 lakh crore, an increase of close to 46% in a period of just one year.

My guess is a significant portion of this growth was due to lending against gold jewellery. Of course, most borrowing against gold jewellery happens through small jewellery shops.

There is no data available for that. Nevertheless, given that people are borrowing against gold jewellery from the formal financial system, it only suggests that something similar must be playing out in the informal system as well. So, gold as usual has come to the rescue of families which have faced financial stress due to covid.

In fact, as this newsreport warns, there is a “deepening distress among the public due to the pandemic” and “that banks are headed to an NPA crisis from September quarter when gold loans with one-year tenure mature.” NPA stands for non-performing assets. In more general terms, NPAs are referred to as bad loans or loans which haven’t been repaid for a period of ninety days or more. This means that people have borrowed against gold jewellery and now don’t have enough money to repay that loan.

So, what does this mean for you, dear reader?

This beautifully explains why we Indians love gold, the yellow metal that a large part of the world thinks is basically useless. In times of emergency, it can easily be turned into money. Not all age-old wisdom is bunkum.

This also explains the importance of having some money in the bank, in boring savings accounts and fixed deposits. While bitcoin and other cryptocurrencies, and stocks, may provide you the investing adrenaline that you are looking for, they can also fall in the week you need money the most, if you are facing a financial emergency. Which is why money in the bank is very important, however boring it might sound.

In fact, the oldest wisdom in investing is perhaps the most boring. Don’t put all your eggs in one basket. Spread it around. Have some money in stocks. Some in gold. Buy a house, if you want to live in it and can afford to make the downpayment and pay the EMI. And have some money in a bank account.

This is as simple as it can get. But it sounds boring. There is no adrenaline rush in this. And it needs you to be disciplined. Hence, you might realise its importance only in times of an emergency, like a lot of Indians seem to be doing over the last one year.

Vivek Kaul is the author of Bad Money and was once labelled Twitter’s favourite economist.

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