A few friends of mine came together to start a new venture. They set aside a corpus to provide for their families before chasing their dream. They did quite well in the first two years. However, they closed down abruptly a few days ago just as they were poised to take off. The reason: inflation. Their families simply could not cope with the rising prices and uncertainty of income to allow them their entrepreneurial indulgence.
Inflation has manifested in the middle-class households in areas other than the bare necessities. The cost of education from pre-primary to college level has soared. The cost of buying a house across major cities is beyond the reach of most. They either pay a very high rent, or have taken loans to buy a house, mostly in the suburbs. The EMI is the biggest draw on a family’s income. The next big drain is in the form of transportation expenses to commute to school, work and social outings. Several maintain multiple vehicles, from cars to a bike per adult family member.
The rate of inflation that applies to just these three major costs of Indian households is not the rate that the government publishes. It is far higher, and in many cases, higher than the rate of growth in household income. The proportionate share of these expenses in the household budget is increasing with inflation, leaving less for other expenses and, importantly, for saving and investment. Worse, households end up spending tomorrow’s income today, taking loans to fund these expenses.
The underlying cause for the uncontrolled inflation in the key consumables of the household is the failure of the government to do its job. Private players offer services at usurious costs to meet the demands of a growing middle-class, which aspires to move up the ladder and secure a higher level of income. If policy action is needed to help households manage inflation, it is in building the infrastructure that the growing middle-class needs to manage its monthly budgets efficiently.
There is an alternate argument. It says that the RBI and, subsequently, the banking system should reduce interest rates. This is expected to make money available for businesses to invest in producing what the households demand, while also enabling them to borrow for their homes, education and vehicles at a lower cost. This is expected to increase the production of goods and services in the system and bring down the prices eventually. There are risks in trying to do this when infrastructure is not in place. It may be difficult for low-cost funds alone to build useful infrastructure if bottlenecks exist. The mushrooming of lowquality and high-cost engineering and management colleges across the country is an example of what lack of policy initiatives can do. Players with no background in education have set up institutions with the singular aim of making profits. The cost of education has moved up, while employability of the graduates who pass out has been dropping. Educational loans have soared, but have become a high-risk venture for banks as repayment by graduates who are unable to find employment is becoming tough.
Low interest rates also fuel speculative booms in real estate, which add to the woes of a household. Classic financial planning advises households to resist from taking loans, and to save and invest to meet financial goals. In a scenario of high inflation in essential goods and services that a typical household consumes, not only does saving become tough, but borrowing also moves up. How can one fight this inflation without waiting for the government to fill up the obvious gaps?
First, the key assets in a household are people. The spouses of all my friends who entered the entrepreneurship venture were not gainfully employed. So, 50% of the human resources of their households did not bring the muchneeded revenue. The choices that women make about home and career are personal. Let us not delve into an argument about how women at home play a critical role and cannot be undermined. Several women generate revenue working out of home on a range of enterprises. Inflationary situations call for augmentation of resources. Households should address this question in their
personal context.
Second, high inflation requires careful optimisation of physical assets. These include the house, cars, jewels and everything else the household acquires from its income. If these are underutilised, money is wasted. A careful consideration about how big a house to buy, how much to lock in the jewellery box, and how soon to replace the car is required.
Third, managing a changing proportion of expenses requires a higher flexibility in the investment portfolio. The investments should be capable of being sold to pay off a loan, or partially fund an education, or to be offered as pledge for a low-cost loan. Locking most investments in property, tax-saving instruments with long lock-in periods, instruments that cannot be pledged, or can be sold only at a high cost reduces the ability of the household to manage its expenses.
Take on board the actual inflation you deal with, and ensure your income, expenses, assets and liabilities match your need to manage that number.
Inflation has manifested in the middle-class households in areas other than the bare necessities. The cost of education from pre-primary to college level has soared. The cost of buying a house across major cities is beyond the reach of most. They either pay a very high rent, or have taken loans to buy a house, mostly in the suburbs. The EMI is the biggest draw on a family’s income. The next big drain is in the form of transportation expenses to commute to school, work and social outings. Several maintain multiple vehicles, from cars to a bike per adult family member.
The rate of inflation that applies to just these three major costs of Indian households is not the rate that the government publishes. It is far higher, and in many cases, higher than the rate of growth in household income. The proportionate share of these expenses in the household budget is increasing with inflation, leaving less for other expenses and, importantly, for saving and investment. Worse, households end up spending tomorrow’s income today, taking loans to fund these expenses.
The underlying cause for the uncontrolled inflation in the key consumables of the household is the failure of the government to do its job. Private players offer services at usurious costs to meet the demands of a growing middle-class, which aspires to move up the ladder and secure a higher level of income. If policy action is needed to help households manage inflation, it is in building the infrastructure that the growing middle-class needs to manage its monthly budgets efficiently.
There is an alternate argument. It says that the RBI and, subsequently, the banking system should reduce interest rates. This is expected to make money available for businesses to invest in producing what the households demand, while also enabling them to borrow for their homes, education and vehicles at a lower cost. This is expected to increase the production of goods and services in the system and bring down the prices eventually. There are risks in trying to do this when infrastructure is not in place. It may be difficult for low-cost funds alone to build useful infrastructure if bottlenecks exist. The mushrooming of lowquality and high-cost engineering and management colleges across the country is an example of what lack of policy initiatives can do. Players with no background in education have set up institutions with the singular aim of making profits. The cost of education has moved up, while employability of the graduates who pass out has been dropping. Educational loans have soared, but have become a high-risk venture for banks as repayment by graduates who are unable to find employment is becoming tough.
Low interest rates also fuel speculative booms in real estate, which add to the woes of a household. Classic financial planning advises households to resist from taking loans, and to save and invest to meet financial goals. In a scenario of high inflation in essential goods and services that a typical household consumes, not only does saving become tough, but borrowing also moves up. How can one fight this inflation without waiting for the government to fill up the obvious gaps?
First, the key assets in a household are people. The spouses of all my friends who entered the entrepreneurship venture were not gainfully employed. So, 50% of the human resources of their households did not bring the muchneeded revenue. The choices that women make about home and career are personal. Let us not delve into an argument about how women at home play a critical role and cannot be undermined. Several women generate revenue working out of home on a range of enterprises. Inflationary situations call for augmentation of resources. Households should address this question in their
personal context.
Second, high inflation requires careful optimisation of physical assets. These include the house, cars, jewels and everything else the household acquires from its income. If these are underutilised, money is wasted. A careful consideration about how big a house to buy, how much to lock in the jewellery box, and how soon to replace the car is required.
Third, managing a changing proportion of expenses requires a higher flexibility in the investment portfolio. The investments should be capable of being sold to pay off a loan, or partially fund an education, or to be offered as pledge for a low-cost loan. Locking most investments in property, tax-saving instruments with long lock-in periods, instruments that cannot be pledged, or can be sold only at a high cost reduces the ability of the household to manage its expenses.
Take on board the actual inflation you deal with, and ensure your income, expenses, assets and liabilities match your need to manage that number.
No comments:
Post a Comment