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From Land of Opportunities to Land of Opportunities

Personal Finance

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Personal Finance article in Advisorkhoj - From Land of Opportunities to Land of Opportunities

As a child I grew up with the notion that the west was the land of opportunities. And it was the same for thousands of teenagers growing in the “just liberalized” India. The dream  of many Indian  students  was to set foot on the land where opportunities mushroomed at a rate faster than  we had  ever imagined.  This  led the  best  of the students  to  take  a crack  at  the  GREs and  GMATs  to crack open the doors to the West. Talent started moving westwards in droves  and  a new  term;  “Brain  Drain” took birth. A few like me who decided to stay back were left feeling deprived.

Contrast this picture with what we are seeing today. Many of  those  who formed   part   of  the  “Brain   Drain” family have taken  a U turn  and have headed straight back to home sweet home. All this has happened  in  a period of less  than   20  years. The tables seem to have turned  by 180 degrees.

I am amazed at this once unthinkable “metamorphosis”. Why do people want to leave a land replete with great infrastructure and order and head towards a  land  of chaos  and  grime? What is this journey from Brain Drain to Reverse Brain Drain all about?

To answer this question, let's go back in time when young bright minds got attracted to the west like the children. of Hamelin  to the Pied Piper.   Even as the brain  drain was flowing unstoppably, it was the industrious parents who were digging into their savings for funding the long journey that their children had decided to take. Clearly there were no institutions falling head over heels to lend the money. It was hard earned savings and not easy debt which became the fuel for the long journey to the land of opportunity. Had it not  been  for  the  savings of their parents, many of my friends would have missed the bus (sorry, aircraft).

Indians have always been serious savers. Mr. R Vaidyanathan, professor  of finance,  IIM, Bangalore, in his article “Why the decline o f  We s t  i s  best  for  u s –   A n d   t h e m ”    in http://www.firstpost.com/world/why-the-decline-of-the-west-is-best-for-us-and-them-104882.html#en says that “At no point in the last 20 years has foreign investment  both  direct  and indirect  (portfolio investment  popularly known  as FII flows)  been  more than 10% of our domestic investment.”

It is interesting to trace out the source of investment   of  our   economy.   In India, investments have been funded by   millions   of   housewives   who manage their homes brilliantly. The savings that households channel into banks has built the foundation of our economy. The prudent saver is having the  last  laugh  today   when  he  sees people globally get sucked into the whirlpool of debt.  His  simple  living and  discipline  has  held  him  in good stead.

While the “west” has suffered because of  its unstinted    love for “consumerism” and  “credit” culture that has pervaded the society at large, in India even we want  to pay off our credit card outstanding as fast as we can.   In the   western   world   people. Bought everything  their  hearts  desired.  People bought more than  they could afford.    It was the cult of credit that  shaped  lives. There  was no notion  whatsoever of “saving for a rainy day”. They were not worried  about the  rains  for  they  knew  that  the  government had  a shelter not just for rain but for every other catastrophe one could think of. Old Age, Health, Single Motherhood whatever, the government had an answer for everything. They knew state was responsible for their lives and even for  their  death.  The  “dole” was their  birthright. The dole had given legitimacy to begging.

Back home there was no dole. If at all, there was the fear of the hole in their pockets  if they did not plan for the future.  One  had  to  learn  to  swim  to  stay  afloat.   It brought discipline and built stamina. And Indians took to this swimming with gusto. Thus learning to swim brought with it long lasting benefits that  have held our economy in good stead.

So what  was  it  that  made  Indians  strive  hard  under trying   conditions?  What   was  it  that   made   Indians embrace the challenges that were thrown upon them?

It   was   our   strong   social   infrastructure which   is popularly known as the “family”.  The well knit family structure played and till this  day  continues  to  play  a defining role in our lives. Our decisions, our priorities, our  needs,  our desires  are  all shaped  by our  family's needs.  For  us,  tending  to  the  needs  of  our  family  is central  to our identity.  We are what we are because of our family.  We have never lived under any false notion that  our government or an institution or a trust  would come  to  the  rescue  of our  family  in dire  straits.  This vulnerability made us “austere” by choice. We chose to sacrifice “consumerism”  and   instead   saved  for  the family.  So what  did  this  lead  to?  What   was the consequence of our “savings”.

When millions of families save, real money (as against printing notes) got into the banks and from the banks as investments into industry. Some of the savings found its way directly into stock markets  as equity capital. All in all our country's investments got funded by real capital formed in millions of homes through savings generated by  some  astute  management of  the  home  budget  by millions  of housewives.

By contrast in the west the need to save was certainly not a priority.   It was always felt that one could fall back on the government in case of an emergency. To add to this, family ties were either tenuous  or non-existent. Hence, the motivation to save for someone was imperceptible.

In fact,  the situation was quite  contrary to what  was playing out in emerging nations. The millions of families in the west were over-spending beyond their means. The credit culture  seeped deep into their DNA and encouraged them to take a dive deep into “consumerism”. People spent as if there was no tomorrow. Hence, families had  no  real  money  left to pump into their economies.

However,  for the rest of the world, the “perception” of the  west  was  extremely  positive.  It was  seen as rich, advanced,  and  stable.   There  was  demand   for  their currency.   There was a strong belief among people that both the “Dollar” and the “Euro” were among the best options   for  store   of  “value”. The  unprecedented penchant for  the  dollar  and  euro  allowed  the  central banks  in the US and  Europe  to go on printing  money without the currencies  losing  any  value. Thus  the savings of the world  created  this deluge of dollars  that fuelled consumerism. However, slowly and gradually US debt started piling up.

People bought  consumer  goods on loans, food on loans and homes on loans.  Home  values went sky rocketing which  resulted  in more  borrowing, more  lending  and more printing of money by the government. People were exuberant in the belief that money will drive the value of assets perpetually upwards. The  mood  of exuberance finally hit a road block when the realization dawned that a very large number  of borrowers were insolvent  and there was no hope  in hell that  they could  repay  their loans.  At the same time inflated  home prices began  to tone down the  demand. Together   these  two  factors played  havoc  causing  unprecedented selling pressure. Even before one realized, the mood changed from exuberance  to   that   of  “extreme  pessimism”.   This resulted in the fall in confidence, credit squeeze and consequently a crash  in the stock  market. Thus,  what appeared to be a virtuous cycle proved  to be a vicious cycle in the end.

In the US, half the households are invested in the stock markets and hence the personal  damage  to people was all encompassing. In contrast, in India, barely 5% of our household savings goes into the stock market.

Excessive dependence of the state and changing demographics are two key factors devastating the West. According to a Wall Street journal article nearly half of US households avail of social security of one kind or the other. This worked fine when  the number of  people working was substantially  higher than the number of people  being supported by the government. Longevity  has bloated the  old  age  dependant population  and burdened a  shrinking younger population with  the  responsibility to tend  to the needs of the old. The ratio clearly is not sustainable. This leaves the government in a tight spot.  If they default  on their promises of social security they stand to lose popularity and get ousted from power. So governments continue to borrow to feed their electorate which in turn raises their debt.

Such acts of profligacy have raised debt levels to nearly 400% of the GDP.  So unless GDP grows at a breakneck speed it will be impossible for the West to pay off its accumulated debts.  The “old” comprise a large proportion of the population and this situation is only threatening to get even worse as we move into the future. Hence the probability of rapid  GDP growth  is bleak to say the least.

In India  there  is hardly  anything  like social  security. From the beginning we have been compelled to build our own nest egg. “Austerity” which is being prescribed a panacea for the west was being  practiced  by us since time immemorial  because that is the only way we know to live. Therefore despite the fiscal deficits that show up in the government's finances year after year,  our  debt position is nowhere close to that of the west.

Some time back  a friend  who  had  migrated  to the US some twenty  years ago suddenly  decided to head back home  because  in India  he still had  his mother  and  his home to fall back upon.

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Dharmendra Satapathy

Dharmendra has just turned an entrepreneur. Prior to this he was Head-Marketing at Tata Asset Management. He is a Mechanical Engineer from University of Pune & MBA in Marketing from Symbiosis Pune. Spent the first 14 years of his career in advertising with Lintas, O&M and FCB. Entered world of finance 7 years ago. To help common man understand financial jargons he created Professor Simply Simple which has more than 100,000 downloads from across the world.

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