Demystifying the Illusion of 0% EMI: The Americanization of Indian Economy
In recent times, purchasing commodities with 0% EMI has become the new norm in India thanks to the current Amazon Great Indian Festival. Many consumers think it's an interest-free way to buy products, leading to an increase in excessive spending, and this has triggered a major shift towards an Americanized Indian economy. However, this isn't entirely beneficial or as straightforward as it seems.
The Deception of 0% EMI
Despite the perception of 0% EMI as an interest-free loan, a study conducted by the RBI in 2013 opened the public's eyes to the fact that interest charges are often hidden in processing fees. Unfortunately, this hasn't deterred consumers, as the promise of a 0% interest continues to prompt over-shopping.
The Downside of a Supposedly Interest Free Life
The Americanization of the Indian economy can be a double-edged sword. It can either enhance the economy or plummet consumers into serious debt. In America, an average household often carries a whopping 80-82 lakh rupees in debt, which equates to $100,000. In India, a similar trend is beginning to arise - a worrying prospect that could lead to significant financial insecurity.
The Facade of Affordability
- Low Savings Rate: Despite higher earnings, the current savings rate in India is at a five-decade low against the GDP. This results from a higher proportion of income being spent rather than saved or invested.
- Minimum Wage Jobs: Salary scales are unbalanced, with entry-level jobs, specifically in IT, paying less today compared to a couple of years back.
- Loan-Oriented Consumption: Even students are enticed to buy products like the latest iPhone on EMI, even if it far surpasses their standard of living.
- India's GDP: While India's GDP is talked about in trillions, it's the GDP per capita that provides a clearer picture of an individual's economic health. India ranks around 120th out of 200 countries, below countries like Iraq and Namibia.
The True Cost of Loans
Most consumers aren't aware of the actual cost of taking a loan. For instance, a retailer who buys an iPhone from Apple at $90 would usually offer a discount to the consumer and make a profit. However, with a 0% EMI, the retailer sells the iPhone at a full $100, having incorporated the EMI into the price. As such, the 0% EMI isn't entirely interest-free.
The Aspirational Culture
More people are borrowing, specifically the less affluent who are primarily spending on liabilities rather than assets. Various societal factors influence this trend, such as societal status and the desire to 'fit in'. Unfortunately, this can lead to chronic debt, especially with the increasing availability of consumer loans.
The Role of Governments
There might be an expectation of governments to curb the trend, but in reality, it's mere wishful thinking. As GDP computation includes consumption, the government benefits from increased spending. Additionally, tax rules and the lifting of certain benefits from saving make investing less appealing.
Making Money from this Trend
So how can consumers convert this seeming disadvantage into a financial gain?
- Be Sensible with Spending: Do not spend beyond your means or borrow to obtain liabilities. Remember, the things you own may end up owning you.
- Invest in Credit Card Companies: As credit card companies are making substantial profits, strategically investing in such companies could be lucrative.
- Understand the Difference between Good Debt and Bad Debt: 'Good' debt allows the creation of assets, while 'bad' debt purchases liabilities. Be prudent with loan decisions, and ensure they are geared towards growing your financial portfolio.
If you're interested in starting your journey to financial security, having a solid understanding of finance and investment fundamentals is essential. Please check out this video on purchasing your first stock and beginning portfolio construction.