Of Bankers, Booms, and Bubbles!! Or, What is Worrying The RBI Governor!!!

The Indian Economy is doing spectacularly and the economy is something that the mainstream media has been covering with much gusto. Anyone whos been following the news would be aware that the Indian Economy is indeed the fastest growing major economy in the world.

However, all these numbers are not exactly a good start by any means. For instance, household debt is now 40% of GDP, which is “worrying” even the unflappable RBI governor, Shaktikanta Das. Moreover, given that Indias growth is fueled by services growth and powered by consumption, it just means Indians are borrowing more to spend, not on housing and other capital investments, but, on wining and dining, and on luxury goods and premium services.

While not necessarily a problem as no advanced economy has grown without debt fueled expansion, the Indian Economy has yet to reach a stage of development where consumption alone would do. Indeed, we’re not even a Middle Income economy, and so WE DO NEED to invest in fixed assets and in other capital investments.

Just look at the figures! 60% of our growth is made up of 40% of debt as a percentage of GDP. So, in effect, we’re spending tomorrow’s money today, without creating value that would fetch “returns” in future. All this is well as long as keep borrowing future earnings to sustain today’s consumption and tomorrow does not SURPRISE us!!

Let that sink in! A debt is a bet on the future, and as long as the future is “knowable”, we don’t need to bother. However, in a “crazy” geopolitical environment and a volatile global economy, worsened by uncertain domestic social landscapes, the “safe” money would go to “smart” investments and not to those living beyond their means.

While your banker might “persuade” to take a personal loan, max your credit card, or offer you money without collateral, remember the aforementioned caveat. Lending that is not “secured” by matching physical assets is inherently “risky” and as soon as the “cost of capital” raises, the debt “burden” too would.

Again, debt is good if used for value creation, and not necessarily for mindless consumption. The Reserve Bank of India or the RBI has been keeping track of the “exponential” rise in unsecured loans and has been increasing the “risk weights” on such lenders to essentially “cool down” the rapidly frothing bubble.

The next time you swipe your card for a bubbly bottle, remember the sound of the Champagne cork bursting can very well be the debt bubble bursting.

Originally published at https://rammohansusarla.substack.com.