Can Cyprus flu infect India ?

Cyprus has reached the heights of its fiscal imprudence. What’s going on there is indeed alarming. Imagine the public debt to be at par with the GDP of a nation. Or let me put it this way you are earning the same amount of money you need to repay someone or may be what if your monthly EMI is as same as your salary considering salary to be your only source of income ?

            Cyprus is the new not so proud member of the eurozone to apply for a bailout (Read as beg!).  Every nation on the face of the earth begs. But what’s so big deal with Cyprus? They don’t have the resources to repay if someone is going to bailout. Of course the IMF and some members of the eurozone have come up with a great plan! What’s the plan?

            Before actually talking about the plan let me tell you something. We all pay taxes! I know how it feels to pay tax at the financial year end.  In India we pay tax on what we earn yeah Income Tax! And we in India do live on our savings unlike in the Dreamland where the nations GDP is driven by consumerism (of some people if you know what place am referring to) where people don’t even know what savings mean. GDP is the market value of the final goods and services produced in a country. And GDP per capita is the indicator of standard of living!  So today you have money and you buy what about tomorrow? I will talk about standard of living in subsequent post. But for now let’s stick on to this. Tomorrow when you don’t have a penny on you then you got to sell what you have; as simple as it is. 

Let’s come back to tax. Currently Government pays interest for your deposits in the banks (at least in India). What if the government, tomorrow says, boy if you want to deposit your money you have to pay some amount of tax! That’s what IMF and some eurozone countries’ plan is. The Cyprus parliament however rejected this bill. But what’s the plan B? Let’s not talk about it since it’s their prerogative.

Let’s talk about if it really affects India. If it does then how and when? Basically for a nations’ public debt to be at par with the GDP the necessary and sufficient condition is that you borrow more than you can repay.  What leads someone to borrow so much? It’s indeed a food for thought.  Speaking in a microeconomic scale let’s see why someone borrows.

1.      You are really in need of that commodity.

2.      You need to just flaunt it.

The former condition is good, provided you can repay what you borrow considering the ROI that you can fetch out of that commodity. But the later is bad; this type of economic condition is driven by sheer consumerism. Consumerism is good to an extent but once you reach the ultimatum, it’s bad. Consumerist approach is indeed important to improve the standard of living but how much?

            Now though the financial condition of Cyprus doesn’t affect India directly, it doesn’t prompt us from giving it a thought and wake up. Thanks to the globalization that the financial condition of one nation or group of nations (EU) impacts the rest of the nations. So if tomorrow EU or US’ economy wobbles then am sure it’s going to affect us. I may even be wrong in saying that it may affect us, but considering the fact that the Global financial system is behaving so anomalously, I say that it may impact India.

            Sometimes it makes me think on what basis one can say that we won’t see the same condition in India in the near future. The banks have been shut down nationwide in Cyprus. Imagine if the same happening in India.

            One solution that I see in my personal opinion is that we need to cut down unnecessary imports. And implementing strict import duties on the unnecessary commodities. Also we can strengthen the manufacturing sector thereby providing the quality goods which are produced indigenously .Which also helps in reducing the unemployment problem and helps us to move towards the export based economy.

            More the pace with which we move towards becoming an export based economy; the Capital deficit tends to get normalized i.e. you don’t spend more than what you can earn!

                        So the mantra is save first, spend next!

Disclaimer: The opinions expressed in this article are the views of the author and are completely unbiased. The author doesn't intend to hurt the sentiments of any nation.