Saturday, March 21, 2009

The Concept of Nationhood

India has been, is presently and will continue to be at crossroads…so said somebody. Well, we have to constantly make choices for our collective journey through time. As we stand today, pausing and wondering on which path to take, I would like to discuss in this post the concept of nationhood that confronted us and our struggle to grapple with this new idea. Read on…..

An ancient civilization donned robes of a new-born nation at the stroke of midnight of 14-15th August 1947 hoping to wake up from its long slumber and make its “Tryst with Destiny”.

An ancient race that was spread over a vast multitude of kingdoms and jagirs woke up a new reality of a vast nation – India or Bharat desh or Hindustan to many more. This, probably, was an abstract and a scary concept as against the cocoon like security of one’s small kingdom.

A population that owed allegiance to a central figure – the King and his family suddenly came alive to the vague concept of State and distant rulers.

People used to a certain form of governance for ages had to suddenly learn an alien concept of “Democracy” and come to terms with the niceties of debate and consensus building.

A rigid and feudal structure and a society divided along caste lines were confronted with the frightening possibility of having to live the rest of their lives practicing “Justice - Liberty – Equality and Fraternity”. This value was sought to be transplanted by those who had access to modern education and had a dream of how this young nation should shape up in the decades to come by.

Till we attained our Independence, the sole focus of our people was to attain Independence from the British. Naively, people believed that all our ills were just due to colonial rule and once independent, they would just vanish into thin air as wisps of smoke, if you will. No thinker, probably, recognized the many inherent contradictions existing and simmering just below the surface.

A pan-Indian identity was as alien as sharing the same bench in a school with an “untouchable”. We grew up and limited our identity to our jagir - Kingdom or Province.

These and many contradictions came to the surface and in fact still keep doing so at repeatedly at regular intervals severely testing our faith and patience. Many wring their hands in despair and are convinced about the futility of our experiment with newer ideas and in some extreme elements the idea of nationhood.

Are we close to writing the final verdict? Where and how do we go? Is the political process over-shadowing everything else? Is there hope at all for us? These and similar questions arise in our minds and torture us as we stand almost decade in this new millennium.

I am more sanguine.

What we see today and what depresses and disturbs us should be seen in the light of what I have discussed above. The last sixty two years have been a process of overcoming these inherent contradictions, assimilating newer concepts, learning a new way of life.

We began as a group of nations and commenced the journey to meld together as a cohesive whole. Our society is grappling with many known and unknown currents and evolve it will. This belief is not based on foolish hope but on a study of human behaviour. Given the diverse background, a sense of identity and reconciliation will emerge in due course and all divisive and disruptive elements would quieten down and merge into the mainstream.

After all sixty years is just a small patch across a canvas stretching over tens of millennia or more.

Give India time…..we will sort ourselves out.

Edited to add:

Priyank made a very pertinent observation. We began an experiment six decades back that EU has just started a decade back and the complexity, religious and social diversity is much more that what EU can imagine. Let me add here - all this has been done without two world wars and tens of millions of human casualties. This is amazing and very creditable and we should be proud of ourselves.

Monday, March 9, 2009

India – At Crossroads

India is an ancient civilization tracing its origin back deep into the past well beyond five - six thousand years. In fact, there is no definite date or period to which its origin can be pegged to.

India, as a political entity, is a young nation in its sixty second year of existence, a toddler compared to the civilization it seeks to represent.

This, in an essence, holds a clue to this “Grand Puzzle” called India. In this apparent dis-similarity lies the clue to this current chaos that reigns supreme. The sense of despair and helplessness that drives us up the wall and makes us exclaim in frustration, “India….What is your future?...Where are you hurtling?”

In my very first post, I had this to say about India

This is that ancient land which claims to have the answers to the deepest riddles that have foxed mankind eons on end and yet it struggles to find answers to various issues that seem to keep it chained to the dark ages.

India has been an unending mystery where the ancient co-exists with the modern, where a fledgling democracy wages a valiant battle with feudalistic mores, where modern values attempt to heal deep societal divisions.

Yet, India is fascinating and deep.

India presents the picture of a modern fledgling “avatar” struggling against an ancient social structure. At the same time one can clearly discern ancient mores and a traditional way of life at significant variance with a more permissive and egalitarian segment of society.

This gives rise to a pertinent question….”Is India at Crossroads?” and how and where do we go from here?

I now hope to embark on a completely different journey. I will attempt to study this complex juxtaposition of the ancient and the youthful and try to make sense of it.

This will be a new series and I also hope to continue with my series of posts on Financial Literacy and Financial Planning.

Sunday, March 1, 2009

To Pre-pay or not…….Make your choice

I have been writing posts which shall eventually lead to a broader discussion on financial literacy and the approach to take to manage one’s finances.

In my last post, I had reasoned that everything boils down to a simple equation (Incomes less Expenses = Resultant surplus). One of the uses that this surplus can be put to is the pre-payment of past loans taken.

I thought it might help if there is further discussion on this, exploring different perspectives.

There are two divergent approaches towards personal debt. Thereafter, there are many factors which influence our decision when to pre-pay an outstanding loan.

Classical economics:

This theory believes that we should never pre-pay loans.

India is in a growth phase (never mind a temporary blip) and a necessary by-product of this is inflation. With continuous inflation over a period (assumed to moderate and high in phases), the value of the rupee will keep falling over the life of a loan. You therefore end up paying back the loan with a cheaper rupee. The value of the rupee continuously erodes over this period due to inflation.

Let us look what inflation has done to the rupee in the last five years. At an average inflation of 6.5% in the last five years, the value of a rupee has fallen 27%. Rs. 100/- (in 2004) is now worth Rs. 73 only. Conversely, due to inflation, you would need Rs. 138/- to buy what cost us only Rs, 100/- in 2004. As the rupee becomes cheaper due to inflation, the burden of repaying debt will progressively reduce.

Traditional economics:

This theory belongs to that school of thought which believes that loans are an unnecessary burden and if we have surplus cash which has no immediate use, then you must utilize it to prepay outstanding loans and reduce your indebtedness.

The rationale is to be debt free and not to live on borrowed money.

Let me now discuss some of the factors that we take into account whilst taking a decision to prepay a loan.

Income Tax incentives.

Our Income Tax rules allow us to pay lower tax if we have a housing loan outstanding. The amount of interest that we pay on our loan can be reduced from our total income for calculation of our tax liability. This results in our income tax being lower.

For every Rs. 100/- paid as interest, we save income tax of Rs. 33.99. The net interest that we actually end up paying is Rs. 66.01. Logically this should be an incentive not to pre-pay the loan.

Surplus cash flows

The borrower may, a few years down the road, have surplus cash flows. This may happen due to increase in income levels, large receipts as bonus, incentives, large business deals / orders, lucrative assignments or gifts / legacy receipts.

The idea is if alternative investment options do not give return more the interest we pay (as in the current scenario), it makes ample sense to pre-pay the loan out of the surplus that we have. If the surplus is not significant, it makes sense to continue with the loan. Remember the old maxim (modified slightly) – A penny in liability reduced is a penny earned.

This will result in reduction in liability and increase in money-at-hand.

The second factor seems to contradict the rationale of utilizing tax incentives. There is some point at which tax incentives stop being material. If you look at that point closely, you have to spend Rs. 100/- to get a tax incentive of Rs.33.99. The day we start asking the question – Why don’t I pay Rs.33.99 and have surplus cash of Rs. 66.01 in hand, we must start prepaying our loans.

From the above arguments, there is no standard solution applicable to every borrower. Each situation is unique and has to be dealt with accordingly. Other factors like, levels of income, flow and sustainability of incomes, impact of commitments in terms of expenses apply and the decision could be not to prepay.

If you were to turn around and ask me what would I do? – I would probably prepay a fifteen year loan within seven – eight years and free my cash flows. Free cash flow also gives me flexibility and the ability to grab good opportunities that may present themselves from time to time. I must also confess that I am a bit of a traditionalist at heart.