KAL, AAJ AUR KAL - DEBT REMAINS A BAD WORD

Vandana and Ajay are a young couple, married for some 5 years, with a three year old toddler. They love to live life and do not think twice before borrowing to buy a car they can ill afford or a house which need not be so big or in a locality which is super expensive to begin with. These two EMIs apart, they love to go “pubbing” over the weekend, use the food delivery app 2-3 times a week despite having a cook who comes every morning. They have enrolled their child into the best pre-school and not to mention the costs of a driver and household helps. And yes, online shopping is rampant; least they look “less,” they take a foreign trip once a year.

For their parents, just looking at the way they live is stressful. They simply cannot understand how and why they need to live beyond their means. But you talk to other parents around and majority of them share the same experience. The younger generation wants a good life while the parents continue to live modestly, having saved throughout their life for the home they own and for their child’s education.

This is really the story of the young India. Most of them live beyond their means and the younger families are much deeper into debt than their parents, all because they want to stay or upgrade their status. Nothing wrong in aspiring for a better quality of life but if it is coming at the cost of such huge debts, are we living right?

There is no doubt that the great Indian middle class is falling deeper into the debt trap to maintain a lifestyle. While the cost of cars, education, houses, and medical care have become super expensive, incomes have largely remained stagnant. And filling this gap between earnings and spending, there has been an explosion of finance into nearly every corner of the consumer economy.

And with the crisis in the NBFC sector and prior to that the banking, this young generation is now earning to merely repay the EMIs and there is a cut down on many other expenses. And then there are the newer generation, which is seeing how these young couples are struggling and prefer to buy cars but no homes; they believe that home ownership is an increasingly bad investment for young people. They are a part of the young mobile workforce and feel a rented accommodation is more hassle free. Property taxes, maintenance costs and interest paid is adding up to the cost of the houses bought and they see that they will become debt free not in 10-15 years but in 15-20 years. People are also waking up to the reality that house prices will not rise forever.

Sanford C. Bernstein has been conducting a proprietary survey to track consumer leverage for the last five quarters. The report published in part in Bloomberg said that the Bernstein survey of 500 consumers across 21 cities found that, on average, 25% of disposable income is being used to service debt, 45% is being used for household expenses and the remaining 30% is saved. The proportion of income being used for debt servicing has increased marginally from 23% a year ago. The proportion of borrowers spending 40-60% of their disposable income to service debt is 13% and those spending more than 60% is 6% of the total respondents.

There is a growing generation of population, very different from their parents values and ideologies; the only thing common is that they too want to live in solid middle class neighbourhoods with good schools and medical aid, with reasonable commute. Most houses offering all this are out of their reach and hence they prefer to rent. Thus what we are seeing is a radical shift in the entire market structure itself and this is what the future beholds where buying a new home and in some markets, even an existing home will become a luxury. When home buyers sell homes under the garb of “affordable” what they do not take into account is the buyer’s other debts.

The suicide of CCD founder, Siddhartha brings to the fore the dangers of debt. And he could not handle it despite being a billionaire, having more assets than liabilities. Financial duress can be the biggest killer, not just suicide but gives rise to other ailments within the body and mind. Thus nothing holds more relevance today than the diktat that we need to live within our means.

Taking a debt to buy a house or for funding a college degree is wise as it will boost earnings in the long run. But borrowing for everyday consumption or for assets like cars that lose value makes it harder to save and invest in stocks and realty that create wealth.

Consumer borrowing exacerbates the wealth gap. What was true for our parents and grandfather holds true even today – sacrifices are the key; it will take some gargantuan amount of patience but in the end, it pays, always. Kal, aaj aur kal….the simple truth of living continues.