Rs.1000 in 1980 is only worth Rs. 63 in 2021! How to protect our money?

Published: December 22, 2020 at 10:52 am

Last Updated on February 12, 2022

If you had Rs. 1000 in the year 1980, it would just be worth Rs. 63 in 2021 (down from Rs. 66 in 2020 and 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. How can we protect our hard-earned money? A discussion.

Many readers argue one should invert these numbers. That is a product (or service) costing Rs. 60-80 in 1980 is today priced close to Rs. 1000. This is doubt correct. However, the products we buy today are very different from the ones in 1980, and each has its own rate of inflation.

Although the cost inflation index does not represent how our expenses actually increase over a period of say five or ten years, it is enough for investors to appreciate the folly in investing in safe products. Rs. 1000 in 1980 would have been a handsome salary.

The Indian team of 1983 was only paid Rs. 2100 for the first day-night exhibition match which was played against Pakistan on 21 September 1983 at Nehru stadium New Delhi. This was just three months after their World cup win. Source: Journalist Makarand Waingankar via Twitter on Jul 16, 2019

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    Payments to Indian Team For One Day International dated 21 Sep 1983 shared by Jounralist Makarand Waingankar @wmakarand via Twitter on Jul 16, 2019
    Payments to Indian Team For One Day International dated 21 Sep 1983 shared by Journalist Makarand Waingankar @wmakarand via Twitter on Jul 16, 2019

    Inflation, even the tepid official inflation numbers have devalued spending power considerably.

    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.

    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
    2020-21 301

    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
    2020-21 1283

    This is a year on year increase of 6.76% Imagine the inflation if lifestyle changes (due to needs or wants) is taken into account!

    Cost inflation index from 1980 to 2021
    Cost inflation index from 1980 to 2021

    If we invert this graph with a value of Rs. 1000 in 1980 we get the titular result.

    The decrease in value of Rs. 1000 from 1980 to 2021
    The decrease in value of Rs. 1000 from 1980 to 2021

    Rs. one lakh today would be worth about Rs. 3000 after 30 years at unrealistic overall inflation of about 4%.

    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. So we need to prepare for a long-term actual inflation of 6%.

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

    This means Rs. one lakh today would be reduced to about Rs. 16,000 after 30 years. In other words, if our bare essential annual expenses are Rs. 20,000 today (leaving out EMIs, school fees etc.), we need about 1.15 lakh to account for just these expenses.  We will have to include health-related expenses and lifestyle changes in the middle!

    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 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 paise to drink a cup of tea on the road. You invest the remaining 50 paise 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, to 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 hurt 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.

    Merely investing in equity alone will not solve the problem. Long-term investing in equity will not always be successful. See for example: What return can I expect from a Nifty 50 SIP over the next 10 years?

    A higher income, the right investments, and active risk management is the only way to protect inflation degrading the future value of our networth.

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