Imagine 2 persons who are middle income earners. Let us assume that both earn about the same pay. Both are staying in their own houses passed down from their parents.
One of them, let me called him A, is prudent. He maintains a simple lifestyle, employs only a maid, does not spend on luxurious goods, and saves up most of his income. With his savings, he bought another house with a bank loan, and rents out that house, using the rent to pay the instalments for the bank loan. Whatever he saves goes to help paying the mortgage too. In a few years time, he sold the property and use the proceeds earned to buy 2 separate properties, again with bank loans, again renting them out, again using the rentals to pay for the instalments.
In time, he will be a proud owner of many properties, and with most properties paid off, he is now considered a very rich man.
The other person, let’s call him B, started off with the same income. He is even more fortunate, for one day, when he as digging in the garden of his ancestral home, he found a big box of gold bunions.
Instead of using his fortune to invest like A above, he employs a driver, 3 maids, 3 gardeners, a cook, 2 cleaners, a nanny, 2 guards. Most of these staff are redunctant, and most spend the days chatting instead of doing work.
Using his bunions as collateral, he borrows from various banks and has many credit cards. Because his lifestyle is so luxurious, his income cannot sustain him, and what sustains his lifestyle is the borrowings. One day, when he finds his income unable to pay the interest of the loans, he has no choice but to mortgage his own house for more funds just to service the previous loans. That is actually the point of no return. Once his income cannot service his loan, and he has to use fresh loan to cover the interest of his existing loans, he has already cross the line to bankruptcy.
The above is actually happening everyday. Even among the younger generations, many have become bankrupt because of borrowings that they are unable to service.
Borrowings can be good if it helps to increase income. Borrowings are bad if it is merely use for operational costs, like keeping a huge staff that is many times above what is needed for the same productivity. The examples of A and B are clear illustrations.
Extrapolate the above to nations, and we will understand why some nations which have big borrowings but still manage to get richer and richer, and others which are collapsing under the huge borrowings that they have accumulated over the years.
Our country too has debts which is now about 53% of our GDP. If these debts are used to generate income that can be more than the interest, then we should be able to reduce the borrowings in future, and at the same time, progress faster than if we just use our own funds..
However, if the borrowings are used to service operational costs, a big part of which goes to pay remuneration of our civil service and servicing interest payments, then we must start thinking of more prudent ways of managing our spending.
We have not reached the point of no return yet. But at 53% of our GDP and with sluggish economy growth of around 3-4% next year (this is my estimate, but it can go lower in view of the uncertainty in the West), we must start planning to reduce our debts. We can easily start that by reining in our wastage and leakage; we can actually see how our funds are wasted looking at Auditor General’s report. A few years ago, an international renown financial house estimated our leakage and wastage to be around 100 billions. It must be more now.
It is like a patient who is having a bacterial infection of his toes. Bacterial infection of such kind can be cured easily if treatment is given early. Once the infection goes up from the toe and involves the whole foot, it can still be managed but it will take a longer time to recover. But if the infection is left alone at the stage of foot involvement, it can easily infect the blood stream and septicemia may set in. If there is septicemia, and if the bacteria is of a virulent type, then I can only pray for the patient , for at that stage, a point of no return may have been reached, and treatment may not be effective.
The Chinese has a proverb advising that “we must be prepared for the rainy days”. I think that is the wisdom which will do any nation good.