I would like to start this post with Nobel Laureate Paul
Krugman’s quote “Much of the past 30 yrs of study in Macroeconomics was
spectacularly useless at its best and positively harmful at its worst”.
The word ‘Globalization’ has been misunderstood by almost
all of us. Liberalization, Privatization and Globalization (LPG) does not
necessarily mean that we must mindlessly follow the Western way of living and
bluntly implement the economic policies formulated in the West (which are in
any case proving to be a disaster). Our policy makers fail to understand
the Indian society and the Indian way of living. India is different from
the West (America and Europe) and policies formulated in the West before 30
years will not deem fit to the Indian economy which is structurally different.
The economic policies that are declared obsolete in the West
are being re-branded as big ticket ‘Reforms’ by our policy makers, the best
example is FDI in retail. The common man like you and me must go the
extra mile to understand and question the policies that are thrust upon us,
rather we like ‘herds’ accept whatever is propelled on us without any due
diligence. The present generation seems to be carried away by the western
lifestyle, which is largely fueled by the new found so called ‘economic
prosperity’.
Sayings like “Live within your means”, “Save for the rainy
day” have become old fashioned. India that has traditionally been a
savings driven economy is now fast turning to be debt driven. I could see
school / college students flaunting mobile phones that cost anywhere between
30k and 60k, young executives parading with 1500cc motor bikes and ultra luxury
cars that cost a Bomb!! Thanks to the easy availability of Credit (read
EMI). The culture of saving that has been the backbone and face saver of
our economy is dying a slow death. High disposable income in the hands of
irresponsible youngsters has adverse impact not only on themselves but also on
the nation at large.
A young executive (from a middle class background) who earns
Rs. 60,000 a month has a credit card outstanding of 3,00,000, car loan of
4,00,000 and a personal loan for 2,50,000 and savings…. ZERO!! The
new mantra is spend over and above your means, enjoy life and make merry.
Such reckless attitude towards money has larger implications that impacts the
economy at large and not just the individual. Read on.
The Market driven economic policies formulated and
propagated in the early 80’s by the then British Prime Minister Margaret
Thatcher (Thatcherism) and American President Ronald Reagan (Reaganomics) that
are proved to be the root cause for most of the current economic woes in the US
and Europe, are re-labeled as ‘Economic Reforms’ in India. To put it in
simple words, Economic policies that are considered outdated and discarded to
dustbins by the Western nations are cherry picked by our ivy league educated
policy makers and put to use in India.
Free markets, foreign investments, control over public
expenditure, huge tax cuts and rebates to multinational corporations,
privatization and deregulation of the economy are the strategies of Thatcherism
and Reaganomics to revive their respective economies from depression. As
a consequence, no doubt the West reached heights in terms of economic
prosperity, but it is these very policies that perpetuated the current global economic
meltdown.
Well, now let us understand the economic model for growth
and development the west has been relying and advocating for decades.
Shop for growth, spend for development was the sole mantra of the US
government, the policymakers and the so called intellectuals were literally
running a campaign “Shop for America”.
As an extension to this, the Fed (like we have RBI in India)
started to cut down the interest rates to near zero levels. In the 1980’s
the US prime rate was as high as 21.50% which has dwindled to 3%. The
policymakers were encouraging the alarming trend of not just spending, but even
went to the extent of propagating “borrow and spend”, it is with this intention
the interest rates were curtailed and brought down to near zero levels.
The infamous Fed chairman, Alan Greenspan once in his speech
said that people in the 3rd world Asian countries like India save because they
feel insecure, he further said that the government of such countries were not
capable of providing social security to the poor, unemployed and the
aged.
Mr. Greenspan failed to recognize the fact that in countries
like India and Japan unlike the west, it is the family and society which forms
the basis for social security and not the government. In India, the father
takes care of his son till he finds an employment, the son takes care of his
aged parents, the disabled siblings are taken care by the family, the orphans
and the left alone oldies are taken care by the society. Therefore people
in India SAVE, they do so not because they are insecure of their future but to
support their family and society. A father saves because he has to fund
his son’s education and daughter’s marriage; a son saves because he has to take
care of his aging parents. This family and society driven economic model
is the structural difference between the West and the East.
In the West, we can find that the families are awfully
disrupted, statistics say that 51% of the 1st marriages end in divorce, 65% of
the 2nd marriages end in divorce and a whopping 70% of the 3rd marriage end in
divorce, therefore there is no ownership or obligation for the citizens towards
their family, neither a necessity to save.
The savings to GDP ratio is a stunning 35% in India which is
one of the highest in the world, whereas the savings to GDP is negative in the
America. There is absolutely no necessity for the Indian government to
rely on foreign investments to fund the burgeoning fiscal deficit or to finance
infrastructural, industrial development. For all those who think it is
the dollars from America that is fueling growth in India, the ground reality is
different, it is a mere 2% of India’s investment which is funded by the FII’s
and the FDI’s, the rest 98% is generated from within the country by “domestic
household savings”, while the West is compelled to borrow money from India,
China, Japan and other emerging economies to lend its citizens who are used to
‘borrow and spend’ culture. It’s high time we take pride in being a
savings driven economy unlike the west that is consumption driven.
It is our family, society and the culture of saving that
saved us from all the economic catastrophes that our country had faced
earlier. Unfortunately the current generation seem to think and act like
westerners, spending over and above one’s income is considered
fashionable. This culture of borrowing and spending is a perfect recipe
for disaster. There is no doubt that India is an emerging economic power,
there are 100’s of reports that suggest that India will emerge as the supreme
‘soft’ power in the future. In order to be a more matured and
responsible super power, we must stick to our basics, learn from the mistakes
of our western counterparts and not try to ape their way of life, a copy paste
will prove to be a tragedy.
Try to live within your means, spend what is left after
saving, avoid wasteful expenditure, never borrow to spend, be simple and
charitable, appreciate and live the “Indian way of life”. Jai Hind.
