Inflation in India: Will it ever decrease?

Published: September 25, 2013 at 2:22 pm

Last Updated on

Inflation – a gradual decrease in purchasing power with time – affects all human beings. The average inflation in India is more than twice the average inflation in the US.  Will inflation in India ever increase?  Many seem to believe that after a long time (say a couple of decades later) inflation will decrease, as India becomes a developed country.

I am no expert in economics, but such sentiments seem to be a baseless dream, for the following reasons

India – the land of subsidies

A subsidy is a privilege offered by a government when it sells something (usually a resource) to its people for a price much lower than the production cost or the price of import.

We all know that the price of petrol, kerosene, and LPG (among other things) and subsidized by a huge amount – about 30-35%.

To me, this is the most important cause of inflation.  We do not have enough resources in our country to produce our own petrol, kerosene, and LPG.  We import crude oil – a very expensive thing to do!

Each time the international crude oil price increases the Government does not pass on the increase to the people – it incurs a loss.

There is of course a limit to the total loss the Govt. can bear.  Therefore, the subsidy gets lowered gradually with time.

So Indians (at least the ones living in India!) have to contend with two factors

  • General inflation of all resources
  • The extent of loss the Govt. can withstand with respect to each resource.

I would guess that the net result of these two factors is repeated price increase –although I do not know how or why!

Bottomline: If there was no subsidy, the increase in fuel prices will be much, much smaller, almost equal to the general international inflation.

Questions:

  • If the fuel subsidy is removed, how many of us can afford to use a vehicle?
  • Will it not adversely affect the economy?
  • Do you see the subsidy going away anytime soon?  (Think politics.  Think elections)

India – the non-industrial economy

 It is obvious to everyone that India is not an industrial power.  We do not manufacture most of the things that we use – from computers, to smart phones to vehicles to … the list is endless.

India is an agricultural power. No doubt about that. Thanks to sustained government effort, our agricultural exports have steadily increased; we can serve more mouths and can handle a famine without alarming increase in inflation.

Typically a nation that starts out with an agricultural economy moves onto an industrial economy and then to a service economy. China is very good example.  China has a thriving agricultural and industrial economy. Perhaps because of its communist government it cannot have a good service economy, but that it is no big deal.  Agriculture and industry will hold the nation together.

In India, we jumped from an agricultural economy to a service economy, completely ignoring industrial growth.

By service economy, I am referring to software industries!  Other nations give us work and we do it.  If they do not give us work, we are out of a job!

It is obvious that among the three economies, we have very little control over the service economy.  Unfortunately, because service economy has preceded industrial economy, there is very little chance of India becoming an industrial power.

Being an industrial power is important for not just the growth of the country but also for containing inflation.

Bottomline:  When we manufacture what we need, we control the prices better.

Questions:

  • Do you see India becoming an industrial power anytime soon?
  • Do you see Indian youth preferring hardcore engineering jobs to comfortable software jobs anytime soon?

India – the land of monsoons

We all know that our agricultural produce depends crucially on the amount of rainfall we receive.

Bottomline: Rainfall has a huge role to play in determining inflation, at least food inflation.

Questions:

  • Do you see this situation changing anytime soon?
  • What are the chances of India receiving normal rainfall year after year?  (Think of global warming and general destruction of world ecology)

India – the land of corruption                                                                                         

We may not be the most corrupt country in the world, but we certainly are a contender.  Widespread corruption implies disproportionate distribution and access to resources.

Misuse of public funds implies increased burden on the taxpayer.

As I said, I am not economics expert, but I willing to bet that corruption is one of the major factors that influences inflation.

Question: Do you foresee corruption in India decreasing anytime soon?

India – the land of .. er ..  people

Let us face it; every problem in India can be traced in two steps to its population.

India maybe an agricultural giant (relatively speaking), but there are still more malnourished children in India than there are people in many countries!

Every country has subsidies.  It is India’s population that makes the amount and extent of subsidies appear huge.

Population may or may not directly influence inflation.  It certainly magnifies the factors that influence inflation – corruption and subsidy to name just two.

Large population implies inefficient distribution of resources and high costs involved existing distribution mechanisms.

The mid 80s saw a very vocal population control drive. It is nowhere to be seen today.

Controlling population is not only important for the economy, it is also crucial for the fiscal fitness of young Indian couples!

~~~~

  Given all these factors, do you really think inflation in India will decrease anytime soon?

Let us ask a more specific and more relevant question.

Given all these factors, what are the chances that inflation will decrease before we retire?

My answer: No chance

My solution:

What do you think?

PS. I apologise for the non-technical nature of this post. My point is even a layman like me with a little thought can realize that inflation is not going to decrease anytime soon.

If you can offer more sensible explanations please feel to add them in the comments section.

Do share if you found this useful
Share your thoughts on this topic at the  Reddit freefincal_user_forum

Reach your financial goals like a pro! Join our 1600+ Facebook Group on Portfolio Management! You can now reduce fear, doubt and uncertainty while investing for your financial goals! Sign up for our lectures on goal-based portfolio management and join our exclusive Facebook Community. The 1st lecture is free!
Want to check if the market is overvalued or undervalued? Use our market valuation tool (will work with any index!) or you buy the new Tactical Buy/Sell timing tool!
About the Author Pattabiraman editor freefincalM. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. since Aug 2006. Connect with him via Twitter or Linkedin Pattabiraman has co-authored two print-books, You can be rich too with goal-based investing (CNBC TV18) and Gamechanger and seven other free e-books on various topics of money management. He is a patron and co-founder of “Fee-only India” an organisation to promote unbiased, commission-free investment advice. He conducts free money management sessions for corporates and associations on the basis of money management. Previous engagements include World Bank, RBI, BHEL, Asian Paints, Cognizant, Madras Atomic Power Station, Honeywell, Tamil Nadu Investors Association. For speaking engagements write to pattu [at] freefincal [dot] com
About freefincal & its content policy Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on developments in mutual funds, stocks, investing, retirement and personal finance. We do so without conflict of interest and bias. Follow us on Google News Freefincal serves more than one million readers a year (2.5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified from credible and knowledgeable sources before publication. Freefincal does not publish any kind of paid articles, promotions or PR, satire or opinions without data. All opinions presented will only be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
Our publications

You Can Be Rich Too with Goal-Based Investing

You can be rich too with goal based investingPublished by CNBC TV18, this book is meant to help you ask the right questions, seek the right answers and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now. It is also available in Kindle format.
Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want Gamechanger: Forget Start-ups, Join Corporate and Still Live the Rich Life you wantThis book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at low cost! Get it or gift it to a young earner

Your Ultimate Guide to Travel

Travel-Training-Kit-Cover-new This is a deep dive analysis into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, how travelling slowly is better financially and psychologically with links to the web pages and hand-holding at every step. Get the pdf for Rs 199 (instant download)
Free android apps