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.
- 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.
- 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.
- 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
- Adopt a frugal lifestyle
- Invest (at least!) as much as you spend for retirement
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.