My column in today’s DNA:

Most of us incur debt in our everyday lives. Buying goods on a credit card is undertaking debt. Buying a house with a loan is debt. So is buying a car. Taking a loan from a bank to expand business is debt. Most of us are very aware that we need to pay back the debt.

The debt that we incur has two components to it: Principal, a proportion of the money borrowed, and interest, the cost of money.Debt is undertaken to plug the gap between current and expected future incomes, and is also a way of plugging the gap between current income and current expenditure.

Debt is of two types: the first is borrowing for a perceived sure investment. For example, home loans or education loans help us build assets that would come in handy in the future. The second reason for taking on debt is expenditure. A new wardrobe, new furniture, money for wedding expenses, etc fall under expenditure. These have no ‘resale’ value. Once spent, there is no return on it. It is money that is gone for good.

When you can’t repay a loan or the interest on a loan, you are said to default on payments. The effect of default is different for different types of loans. If you default a secured loan that is guaranteed by an asset — property, vehicle, machinery — it is likely that you will lose that asset. If you default an unsecured loan — like a credit card — you may have recovery agents coming to your place of residence or work and creating mayhem.

With individuals and companies it is relatively easy to recover debt. Sell off everything. Pay off those you owe. And start life again. For many, like farmers in Vidarbha, the starting life again is not an option. They choose to end it.

But a number of things throw this equation out of synch. The first is leakages — also called corruption. People don’t get what they are supposed to, and remain in poverty. The government’s expenditure is no longer an ‘investment’ but a method of lining pockets.

The second is lack of a regulatory framework that allows greed to overcome prudence. For example, a half-decent regulator would have prevented the US sub-prime crisis. The loss caused by the crisis required bailouts worth billions.

The third is regulation based on dogma that curtails investment and thereby growth. For example, the dogma against FDI in India. That dogma has prevented investment, expansion, jobs and growth.

 

The rest of the article is here.