How an individual can avoid India’s middle income trap? And why it is so important priority to act now?
In this blog, I have given a glimpse of macro-economic connections with India followed by how an individual can avoid middle income trap.
In last couple of decades, more than two time world economy fall through gaps VERY BADLY. Some can argue upon Asian Crisis end of 1990s than Dotcom bubble, 2008 Lehman Bankruptcy etc.
Did India learnt anything from it? Did India took any radical path to hedge itself, according to its own demographic traditions, culture or people’s attitude and mindsets?
Dr. Ruchir Sharma tells in his book, ‘Breakout Nations – In Search of the Next Economic Miracles’, India will be able to put all young people to work because of education system, entrepreneurial zeal, and strong links to the global economy. But India is already showing some of the warning signs of failed stories, including early-onset overconfidence.
According to a research paper, ‘What Caused the Asian Currency and Financial Crisis?’, current account deficit and foreign indebtedness, growth and inflation rates, savings and investment ratios, real exchange rates, etc..
Many of these factors exists in Indian system, and some had been taken care by Reserve Bank of India.
According to my view, this current period could be far worse than post-Lehman crisis. In my blog, ‘Past 2 years <- ‘?’ -> Next 2 years’, in third ‘?’ I have shared views. In these times people are addicted to spending, thanks to growing income levels – both in private and public sectors – and consumers’ confidence, see chart 1 – GDP per capita growth y-o-y.
But it also supported double digit inflation. And Reserve Bank of India is taking crucial steps to curb inflation at cost of growth. In near future if Fed Chairman Mr. Bernanke stick to his words – taping QE 3 – then scenario would be worse for India. And it is more likely to happen.
Now, what can an individual do to in such situations, where the pay hike in the next future would be probably low?
My views are,
Step 1: List down your long term (3 to 5 years) future needs and goals. Like buying a house, child’s education, set aside emergency funds, building corpus for particular needs etc.
Step 2: Try to avoid taking pure liabilities by mortgaging valuable assets. Like Loans, other mortgage liability etc.
Step 3: If possible try to get rid out from luxury, by controlling current life style by some percentage. Income inflows does not matter, where you divert it makes difference.
Step 4: Stop fooling yourself – I am strong; my inflows are strong; I’ll overcome the tide by myself. Sorry to say but you have neither strong exposure nor time to track your financials. One of my famous saying is, ‘When it comes about money you have a choice to avoid risk, by just paying little premium – in terms of insurance or financial planner.’
Step 5: Get in touch with financial advisor or planner, who can help you to build strong corpus and portfolio according to your risk assessment.
Think on it! Share your views and comments.