Rs.1000 in 1980 is only worth Rs. 66 in 2020! How to protect our money?

If you had paid Rs. 66 for an item in 1980, it would cost Rs. 1000 today! Inflation constantly reduces our purchasing power. Here is how we can handle this risk.

Published: February 24, 2020 at 11:32 am

Last Updated on December 29, 2021

Yes! If you had Rs. 1000 in the year 1980, it would just be worth Rs. 66 in 2020 (down from Rs. 68 in 2019)  if we use the cost inflation index (CII) data published by the government. The trouble is this index is an underestimate and out lifestyle has changed (if not improved) with the help of technology. So actual inflation is a lot higher. Here is how we can protect our hard-earned money.

CII is the index used for computing indexation benefits for long terms capital gains tax computation and is proportional to the consumer price index. However, it does not realistically represent the inflation in our expenses.

Show below is the CII data with a base of 100 in 2001-2002. This is the data to be used for the computation of LTCG from real estate, non-equity mutual funds etc.

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    Cost inflation Index From 2001

    FY CII
    2001-02 100
    2002-03 105
    2003-04 109
    2004-05 113
    2005-06 117
    2006-07 122
    2007-08 129
    2008-09 137
    2009-10 148
    2010-11 167
    2011-12 184
    2012-13 200
    2013-14 220
    2014-15 240
    2015-16 254
    2016-17 264
    2017-18 272
    2018-19 280
    2019-20 289

    This is the cost inflation index data (CII) from 1980. In 2016, the base of the index was changed from 1980 to 2000 (above data), both scales have been integrated into a single index below.  You can copy and paste into a spreadsheet.

    Cost inflation Index From 1980

    FY CII
    1981-82 100
    1982-83 109
    1983-84 116
    1984-85 125
    1985-86 133
    1986-87 140
    1987-88 150
    1988-89 161
    1989-90 172
    1990-91 182
    1991-92 199
    1992-93 223
    1993-94 244
    1994-95 259
    1995-96 281
    1996-97 305
    1997-98 331
    1998-99 351
    1999-00 389
    2000-01 406
    2001-02 426
    2002-03 447
    2003-04 463
    2004-05 480
    2005-06 497
    2006-07 519
    2007-08 551
    2008-09 582
    2009-10 632
    2010-11 711
    2011-12 785
    2012-13 852
    2013-14 939
    2014-15 1024
    2015-16 1081
    2016-17 1125
    2017-18 1159
    2018-19 1193
    2019-20 1232

    This is a year on year increase of 7% Imagine the inflation if lifestyle changes (due to needs or wants) is taken into account!

    Cost inflation index since 1980
    Cost inflation index since 1980

    If we “invert” this graph, we will get the one shown in the featured image above. Rs. 1000 in 1980 would only be worth Rs. 66 in 2020. If we assume a modest (unrealistic) 5% inflation in over the next 30 years, one lakh today would be worth about Rs. 20,000! This implies that we need to invest right so that our investment grow at a pace greater than inflation after tax! The trouble is this 7% is an underestimate.

    Price of petrol per litre in the metros

    Price of one litre of petrol in the four Indian metros since 1990

    Fuel costs alone have increased by 6-8% over the last three decades. This means for any business to be profitable, the cost of their service or product should increase at a higher pace. Meaning, we need to shell out that much more.

    Personal inflation: an example

    This is my family’s personal inflation as detailed before: Inflation in India: Some Real Numbers

    personal inflation data for my family over 20 years

    Notice the increase in fuel, electricity, paid-help and vegetables. All these contribute to the overall 8% number. However, this is for a frugal family that does not eat out. That does not go to malls or the cinema. We do not change smartphones, cars or television every few years. Inflation on basic necessities is 8% without considering lifestyle creep! Unless we take corrective steps, we would like the hamster running in the same place on a wheel (picture above)

    Lessons from a cutting chai

    Suppose you had Rs. 1 in 1990 and used 50 paisa to drink a cup of tea on the road. You invest the remaining 50 paisa and decide to drink a cuppa from that amount after 29-30 years. To so do, that Rs. 0.5 should have grown to Rs. 10! Meaning an after-tax return of about 11%.

    After 20 years, tea on the street will cost about Rs. 60. If take Rs. 20 today and drank a cuppa with and invested the remaining Rs. 10, in order drink cutting chai after 20 years, the post-tax return required is Rs. 60. If we choose not to take and stick to a safe return of 7%, then we need to invest 80% more!! That is Rs. 18 to drink tea after 20 years!

    projected price of roadside tea over the next 20 years
    the projected price of roadside tea over the next 20 years

    Would you rather invest 80% more to get safe returns or would you rather take some risk, learn to manage it and invest a reasonable amount?

    This situation is a lot like a fork in the road. If you have to choose between guaranteed failure (if we do not invest enough) and a chance of success (if the risk is managed right)

    Fork in the rtoad and the decision you need to take about whether to take investment risk or not!
    Picture courtesy: Wikimedia Commons

    How to protect our money? What is the solution?

    There is no option. Unless long term portfolios contain at least 60% of equity (rest in fixed income), you will not be able to beat inflation. Your purchasing power will keep going down and will hut bad when your income drops to zero, aka retirement. Therefore, start as soon as possible, invest as much as possible and build a portfolio with good equity exposure as quickly as possible. There is no other practical option.

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