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Tag: current account deficit

Managing households and economies

Two years ago next next week, I was laid off from a large investment bank. Thanks to my then boss, I had a heads-up – it was only a question of when. I had started making contingency plans – which is the business I run right now. In fact, I had been planning to do this before I got to know that I wouldn’t last much longer at that firm, but that is an incidental point.

The point is that on one particular day two years back I realized that there was going to be a drastic reduction in my (and thus my family’s) cash inflows. And so we begun to make contingency plans. Now,  remember that I already knew what I wanted to do next, but I knew that it would take time before it would begin to produce positive cash flows (in fact it would take a year). So the challenge was on how we were going to finance our living in the interim.

What puts me on a weaker footing in such discussions is that I’m not organized. If you ask me how much I spend in a month, I can’t tell you without checking my bank account statement. I believe I don’t spend too much but don’t calculate too much at the time of spending either. Yes, I’m a data scientist but I don’t quantify my life.

Coming back, we made an estimate of how much we spend and realized that there would a deficit that we would have to finance. I had ruled out taking up another job, as I had believed that the time was right for me to do my business. One option was dipping into savings – I had a fair bit tucked away in fixed deposits, and could break one of them. However, the wife wasn’t sure if we should dip into savings for day-to-day expenses. “Let us see how we can cut our expenses”, she said.

And so we sat and tried to analyze how we could reduce our spend without significantly affecting our quality of life. “Use the car only when absolutely necessary” she said, and I agreed it was a good idea. Then she suggested that we shouldn’t eat out (we were already paying a cook a fair sum every month), which I again agreed with. So we proceeded, line item by line item, trying to weed out unnecessary expenses.

Soon, we were out of low hanging fruit (eating out, car, etc.) and things started getting absurd. “Why should we spend Rs. 1000 per month on electricity? We should cut it down by 10%”. “We don’t need two business newspapers. Let’s stop getting Business Standard”. “We should cut our respective phone bills by 10%”. “Do we still need a land line?” While all these are excellent ways to cut expenses, the problem is that it did little to solve the problems. The deficits that we would have to finance every month was of a different order of magnitude, and while measures such as this helped chip away at the deficit, they had little impact on the overall deficit itself.

I’m telling you this long story now because it reminds me of how the Central Government is trying to save the rupee from falling further. For a long time, there were steady foreign exchange inflows into India, thanks to foreigners wanting to invest in our country. This flow of dollars made us complacent, and we weren’t particularly worried by our high import bill. We continued importing heavily, and with the fund flows subsidizing the dollar imports remained cheap, too. We didn’t bother to take steps to boost our exports, though.

So now, the fund flows have stopped coming. And the government needs to do something to make sure our deficit doesn’t grow. And so they have started chipping away at corners. They have increased taxes on gold imports. They want to restrict timings when petrol can be sold. They want to further tax import of apples (the fruit, not the computer). Yes, each of them will make a small dent in our burgeoning current account deficit. However, it will remain just that – a small dent. The deficit is of orders of magnitude more than these dents.

Just like we would not be able to manage the household budget by simply cutting down on small corners (newspapers, electricity, etc.) the country cannot manage to finance the deficit with small measures such as these. What we need is structural change (at least in my personal situation I knew I was starting a business so the structural change was coming; there is no such thing on the horizon at the government level). Currently it is not clear how that is going to happen. Analysts are predicting further fall in the rupee. Given how the government has gone about trying to defend the rupee, that wouldn’t surprise me one bit.

My household budgeting problem was partly solved by the generous severance pay that my employer gave me along with the pink slip. It kept us going for quite a while, then I cashed out some small savings and then my business started producing cash flows. Unfortunately for the country, investors are not in the habit of giving “severance payouts” when they remove their investments from a country.

Author SKPosted on September 2, 2013Categories finance, personalTags current account deficit, finances, household budgeting, india, laid off, severance payLeave a comment on Managing households and economies

Thank God for the economic crisis

This post is based on my discussion with Baada yesterday. I hereby acknowledge his contribution to this post.

One of the hundred thousand random headlines that The HIndustan Times put on their front page during the last couple of weeks was a statement that China won’t hesitate to help out Pakistan in case India were to declare a full-scale war against Pakistan.

Given both historical precedents, as well as China’s perceived military might, it would be difficult, indeed, for India to attack Pakistan, unless of course there is some other external power supporting it. However, it would’ve been unlikely that the US would’ve supported India in such a war against Pakistan and China. Think current account deficit. Think external debt. Think Chinese foreign exchange reserves. The Chinese threat of economic terror on the US would’ve meant that the US would’ve left India alone to handle its two northern neighbours.

The current economic crisis has changed all that. No doubt it has fucked the US. The point is that it has fucked China even more. China, having been extremely dependent upon US imports in order to expand itself, seems to be in serious trouble now.

If China decides to sell its USD reserves now (the most obvious method of economic terror), the RMB is going to rise rapidly against the USD. And fuck China further in the exports department. RMB will also rise against the Euro and other major currencies. And China will get further fucked.

Effectively, the only way in which China can unleash economic terror on the US is by means of a suicide bomb. Thanks to the current downturn and all that, if China were to destabilize the US economy, it would also have to go down itself. This implies that the chances of China unleashing economic terror on the US in the current scenario are minimal.

Which means that if China decides to support Pakistan in case of a full-blown war, the US, as part of both its anti-terrorism strategy as well as its strategy to find a large Asian counterbalance to China, can support India. The threat of the US entering the war on India’s side will deter China from entering the war. Which means that Pakistan can’t count on Chinese support anymore. Which means that in case Pakistan does some mischief, India can consider the option of going to war. Which means that Pakistan is unlikely to do much mischief now.

So bless the flying spaghetti monster for the timing. Thank goodness this escalation in terror didn’t happen last year, when the Chinese economy was soaring, Acshully, rather than thanking the FSM, we can say that it has been bad timing by the terrorists.

Author SKPosted on December 11, 2008Categories arbit, economics, politicsTags baada, china, chinese threat, counterbalance, currencies, current account deficit, downturn, economic crisis, external debt, foreign exchange reserves, fsm, god, hindustan times, india, pakistan, rmb, suicide bomb, terrorism8 Comments on Thank God for the economic crisis

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