Two years ago next next week, I was laid off from a large investment bank. Thanks to my then boss, I had a heads-up – it was only a question of when. I had started making contingency plans – which is the business I run right now. In fact, I had been planning to do this before I got to know that I wouldn’t last much longer at that firm, but that is an incidental point.
The point is that on one particular day two years back I realized that there was going to be a drastic reduction in my (and thus my family’s) cash inflows. And so we begun to make contingency plans. Now, remember that I already knew what I wanted to do next, but I knew that it would take time before it would begin to produce positive cash flows (in fact it would take a year). So the challenge was on how we were going to finance our living in the interim.
What puts me on a weaker footing in such discussions is that I’m not organized. If you ask me how much I spend in a month, I can’t tell you without checking my bank account statement. I believe I don’t spend too much but don’t calculate too much at the time of spending either. Yes, I’m a data scientist but I don’t quantify my life.
Coming back, we made an estimate of how much we spend and realized that there would a deficit that we would have to finance. I had ruled out taking up another job, as I had believed that the time was right for me to do my business. One option was dipping into savings – I had a fair bit tucked away in fixed deposits, and could break one of them. However, the wife wasn’t sure if we should dip into savings for day-to-day expenses. “Let us see how we can cut our expenses”, she said.
And so we sat and tried to analyze how we could reduce our spend without significantly affecting our quality of life. “Use the car only when absolutely necessary” she said, and I agreed it was a good idea. Then she suggested that we shouldn’t eat out (we were already paying a cook a fair sum every month), which I again agreed with. So we proceeded, line item by line item, trying to weed out unnecessary expenses.
Soon, we were out of low hanging fruit (eating out, car, etc.) and things started getting absurd. “Why should we spend Rs. 1000 per month on electricity? We should cut it down by 10%”. “We don’t need two business newspapers. Let’s stop getting Business Standard”. “We should cut our respective phone bills by 10%”. “Do we still need a land line?” While all these are excellent ways to cut expenses, the problem is that it did little to solve the problems. The deficits that we would have to finance every month was of a different order of magnitude, and while measures such as this helped chip away at the deficit, they had little impact on the overall deficit itself.
I’m telling you this long story now because it reminds me of how the Central Government is trying to save the rupee from falling further. For a long time, there were steady foreign exchange inflows into India, thanks to foreigners wanting to invest in our country. This flow of dollars made us complacent, and we weren’t particularly worried by our high import bill. We continued importing heavily, and with the fund flows subsidizing the dollar imports remained cheap, too. We didn’t bother to take steps to boost our exports, though.
So now, the fund flows have stopped coming. And the government needs to do something to make sure our deficit doesn’t grow. And so they have started chipping away at corners. They have increased taxes on gold imports. They want to restrict timings when petrol can be sold. They want to further tax import of apples (the fruit, not the computer). Yes, each of them will make a small dent in our burgeoning current account deficit. However, it will remain just that – a small dent. The deficit is of orders of magnitude more than these dents.
Just like we would not be able to manage the household budget by simply cutting down on small corners (newspapers, electricity, etc.) the country cannot manage to finance the deficit with small measures such as these. What we need is structural change (at least in my personal situation I knew I was starting a business so the structural change was coming; there is no such thing on the horizon at the government level). Currently it is not clear how that is going to happen. Analysts are predicting further fall in the rupee. Given how the government has gone about trying to defend the rupee, that wouldn’t surprise me one bit.
My household budgeting problem was partly solved by the generous severance pay that my employer gave me along with the pink slip. It kept us going for quite a while, then I cashed out some small savings and then my business started producing cash flows. Unfortunately for the country, investors are not in the habit of giving “severance payouts” when they remove their investments from a country.