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Picture this: India, a nation celebrating a growing economy and rising incomes, is facing a paradox. On one hand, we witness a growing GDP, people embracing the latest gadgets and luxuries, and aspirations taking flight. Yet, lurking beneath the surface is an unsettling truth — Indian household savings have hit a multi-decade low, sinking to the lowest levels seen in 51 years.
Intrigued? You should be. The economic landscape is changing, and it’s not necessarily for the better. As our bank balances grow thinner, our lifestyles often seem richer. It’s the era of ‘having it all,’ but not without a price.
In this article, we delve into the statistics, trends, and unseen forces that are shaping our financial choices. From the allure of 0% interest/zero-cost EMI schemes to the influence of peer pressure and the undeniable impact of instant gratification, we’ll uncover the reasons behind this shocking truth . Moreover, we’ll explore the potential consequences and, most importantly, share some insights that would help create more awareness and possibly avoid getting lured by easy access to money to get into the debt trap.
Welcome to a journey through India’s evolving financial landscape, where savings shrink, debt grows, and understanding the balance is more critical than ever.”
The Disturbing Statistics:
Indian households saw their financial assets, which include bank savings, cash, and investments, shrink to 5.1% of the country’s gross domestic product in fiscal 2023, down from 7.2% in the previous year, according to RBI data. This marks the lowest level in almost 50 years. (Source: Economic Times September 25 2023)
This comes even when the incomes may be rising but compared to what our parents used to save as a % of their incomes, people are saving less. A look at the graph below will show that clearly(Source CEIC Data)
EMI: A Deceptive Lure
Let us look at some of the recent developments to understand what is really happening.
A quick look at the recent online sales during the recently concluded festival season, especially mobile phones shows us the concept of 0% interest EMI/ NO COST EMI, which is becoming popular amongst consumers. While EMI-based purchases have been there for a while, but now the positioning has changed to attract even more buyers.
This is a big trap because in reality there is nothing called 0% interest. Consumers assume there is no extra interest cost and are lured into buying MORE vs what they can really afford. This in turn leads to getting them into debt, and savings shrink.
A deep dive into this will reveal that actually a consumer ends up paying MORE than what they would have paid for had they bought the item outright and not via the EMI route.
Example: If a device was worth Rs 1000, an outright purchase with a discount would have fetched it to you for Rs 900, but using the EMI route you end up paying Rs 1000 finally. There is no “interest” but the extra Rs 100 paid is almost the same as paying interest!
The Borrowers and Financial Choices:
The demand for items on EMI is driven mostly by the younger crowd, who does not really earn as much to afford these but want to acquire the latest and the best more towards feeling better vs the utility.
The question may be that, if incomes are rising, then what is the issue with rising borrowing? The answer lies in a careful analysis of the audience that is feeding this rise in debt, it’s the younger crowd who have started earning or may start earning. The incomes at that level have not risen at the same pace as the prices of items.
Peer pressure and instant gratification are clearly the top reasons causing the rising demand from even college kids for things that can be bought on loans.
The trend is concerning because this is how American society started living off debt in the 90s and today they are deep in debt and living beyond their means is almost a norm vs an exception.
A few Stats are highlighted by the image below ( image courtesy statista.com)
Financial Institutions and the Credit Push:
There is indeed a global trend since 2020 where borrowing has increased. Even governments are borrowing more and with unlimited printing of money, there is very easy access to credit/loans.
When a lot of money finds its way into the hands of banks and finance companies, they need to become innovative and find ways to lend it out in order to make it profitable.
This is why we see so many ways that the finance and lending organizations (primarily banks) are reaching out to the consumer to take loans/credit.
The simplest and most effective way is to offer credit cards, which look like money in hand but are actually not. It’s money that you “may make” in the future.
Debt vs Asset Acquisition:
It’s a question that many of us grapple with: Is taking on debt really as bad as it’s made out to be? After all, if borrowing is the path to growth for businesses like Reliance, and almost everyone takes out a mortgage to buy a home, why shouldn’t I consider it too?
The answer lies in understanding the nature and purpose of the debt being undertaken. Business giants like Reliance often leverage borrowing as a strategic tool to expand and enhance profitability. They utilize loans to fund capacity expansions, make acquisitions, and ultimately acquire assets that contribute to their long-term financial health. It’s a calculated move, where borrowing becomes an investment in future prosperity.
However, it’s essential to recognize that indiscriminate borrowing can lead to catastrophic consequences. A glaring example is the recent downfall of the once-mighty Future Group, led by Kishore Biyani, which operated retail giants like Big Bazaar. The group’s excessive borrowing and uncontrolled expansion ultimately led to its demise.
In essence, the key to successful debt management is understanding the purpose and potential returns on investment. For individuals, taking on debt to purchase appreciating assets like a home can be a wise financial move, as it can lead to long-term wealth accumulation. But, as with any financial decision, a well-informed, strategic approach is paramount.
By making informed choices, individuals can distinguish between ‘good’ and ‘bad’ debt, ultimately ensuring that borrowing becomes a stepping stone to a more secure financial future rather than a path to financial peril.
So the next time you are buying something on an EMI, consider whether is it for acquiring an asset a potential growth in your finances or a liability.
Financial Literacy and Responsibility:
In a landscape where savings are dwindling and debt is on the rise, finding a path to financial wellness becomes a critical endeavour. Fortunately, with the right knowledge and strategies, individuals can navigate these financial waters and secure their future.
1. Financial Literacy: The Foundation of Sound Decision-Making
One of the cornerstones of financial wellness is education. From an early age, we should prioritize financial literacy, teaching individuals the basics of budgeting, saving, investing, and understanding the implications of debt. By empowering people with financial knowledge, they can make informed choices and cultivate financial resilience.
2. Setting Clear Goals and Priorities
Financial wellness begins with setting clear financial goals. What do you want to achieve in the short term and long term? Whether it’s buying a home, saving for your children’s education, or planning for retirement, establishing specific objectives provides a roadmap for your financial journey.
3. Budgeting and Living Within Your Means
Creating and sticking to a budget is a fundamental practice in achieving financial wellness. It allows you to manage your income, allocate funds to essential expenses, and save for your goals. Living within your means and avoiding unnecessary expenditures is equally important.
4. Differentiating Between ‘Good’ and ‘Bad’ Debt
Understanding the difference between ‘good’ and ‘bad’ debt is crucial. While ‘good’ debt, such as a mortgage or education loan, can contribute to long-term wealth accumulation, ‘bad’ debt, often incurred for non-essential or depreciating purchases, can be detrimental. Discerning between the two is a significant step toward financial wellness.
5. Emergency Fund and Insurance
Building an emergency fund to cover unexpected expenses is a safety net that prevents individuals from falling into a debt spiral when unforeseen circumstances arise. Additionally, having appropriate insurance coverage, whether health, life, or property insurance, provides financial protection in times of need.
6. Seek Financial Guidance
Don’t hesitate to seek the guidance of financial experts or mentors who can provide insights and strategies tailored to your unique financial situation. They can offer valuable advice on investments, debt management, and wealth-building strategies.
7. Long-Term Investment and Retirement Planning
While managing day-to-day finances is crucial, it’s equally vital to think long-term. Investing for retirement and other long-term goals ensures financial security in the later stages of life. Compound interest and consistent investing are powerful tools for building wealth over time.
Conclusion: Empowering Financial Independence
In a world where debt often feels like the norm, individuals can choose a different path. By prioritizing financial education, setting clear goals, and making informed financial choices, we can work toward financial wellness and, ultimately, financial independence. It’s a journey that requires discipline and commitment, but the rewards of financial security and peace of mind are well worth the effort.
