Wow! RRajan talks on Dosa Economics & pensioners!
Dosa economics
To see this, let us indulge in Dosa economics. Say the pensioner wants to buy dosas and at the beginning of the period, they cost ₹ 50 per dosa. Let us say he has savings of ₹ 1,00,000. He could buy 2,000 dosas with the money today, but he wants more by investing.
At 10% interest, he gets ₹ 10,000 after one year plus his principal. With dosas having gone up by 10% to ₹ 55, he can buy 182 dosas approximately with the ₹ 10,000 interest.
At 8% interest, he gets ₹ 8,000. With dosas having gone up by 5.5%, each dosa costs ₹ 52.75, so he can now buy only 152 dosas approximately. So the pensioner seems vindicated: with lower interest payments, he can now buy less.
But wait a minute. Remember, he gets his principal back also and that too has to be adjusted for inflation. In the high inflation period, it was worth 1,818 dosas, in the low inflation period, it is worth 1,896 dosas. So in the high inflation period, principal plus interest are worth 2,000 dosas together, while in the low inflation period it is worth 2,048 dosas. He is about 2.5% better off in the low inflation period in terms of dosas.
This is a long winded way of saying that inflation is the silent killer because it eats into pensioners’ principal, even while they are deluded by high nominal interest rates into thinking they are getting an adequate return. Indeed, with 10% return and 10% inflation, the deposit is not giving you any real return net of inflation, which is why you can buy only 2,000 dosas after a year of investing, the same as you could buy before you invested. In contrast, when inflation is 5.5% but the interest rate you are getting is 8%, you are earning a real rate of 2.5%, which means 2.5% more dosas. So while I sympathise with pensioners, they certainly are better off today than in the past.
Let us turn to the industrialist. At a recent conference, I met a businessman who complained that his business was getting torn to shreds by imports. He was lobbying for safeguard duties. When asked for evidence of unfair competition, he said his revenues had not grown at all, with his volume growth barely offsetting the price decline for his product. While commiserating with him, I said lower input costs must be a boon, because commodity prices have fallen even more sharply than output prices. He grudgingly agreed they had helped. When asked about his profits, he eventually admitted they were at an all-time high. But nevertheless, he said, we need safeguard duties because foreigners are dumping below cost! Put differently, businesspeople complain about low output price inflation, but the inflation that matters to them is the inflation in their profits, which is higher. For instance, analysing 2nd quarter results for non-financial non-government corporations, we find that while revenues have fallen by 8.8% year on year, input costs have fallen by an even higher 12.4%, so that gross value added has gone up by 10.8%.
Clearly, there are industries in trouble. We should, however, be particularly careful about raising tariffs at a time when costs are falling everywhere – aside from the inflationary impact, for every happy domestic businessman whose prices are raised by the imposition of tariffs on imports, we have an unhappy domestic businessman whose costs are raised by the very same tariffs, as well as unhappy consumers.
For full text of the speech:http://scroll.in/article/802737/ful...cial-reforms-and-perils-of-debt-driven-growth
Dosa economics
To see this, let us indulge in Dosa economics. Say the pensioner wants to buy dosas and at the beginning of the period, they cost ₹ 50 per dosa. Let us say he has savings of ₹ 1,00,000. He could buy 2,000 dosas with the money today, but he wants more by investing.
At 10% interest, he gets ₹ 10,000 after one year plus his principal. With dosas having gone up by 10% to ₹ 55, he can buy 182 dosas approximately with the ₹ 10,000 interest.
At 8% interest, he gets ₹ 8,000. With dosas having gone up by 5.5%, each dosa costs ₹ 52.75, so he can now buy only 152 dosas approximately. So the pensioner seems vindicated: with lower interest payments, he can now buy less.
But wait a minute. Remember, he gets his principal back also and that too has to be adjusted for inflation. In the high inflation period, it was worth 1,818 dosas, in the low inflation period, it is worth 1,896 dosas. So in the high inflation period, principal plus interest are worth 2,000 dosas together, while in the low inflation period it is worth 2,048 dosas. He is about 2.5% better off in the low inflation period in terms of dosas.
This is a long winded way of saying that inflation is the silent killer because it eats into pensioners’ principal, even while they are deluded by high nominal interest rates into thinking they are getting an adequate return. Indeed, with 10% return and 10% inflation, the deposit is not giving you any real return net of inflation, which is why you can buy only 2,000 dosas after a year of investing, the same as you could buy before you invested. In contrast, when inflation is 5.5% but the interest rate you are getting is 8%, you are earning a real rate of 2.5%, which means 2.5% more dosas. So while I sympathise with pensioners, they certainly are better off today than in the past.
Let us turn to the industrialist. At a recent conference, I met a businessman who complained that his business was getting torn to shreds by imports. He was lobbying for safeguard duties. When asked for evidence of unfair competition, he said his revenues had not grown at all, with his volume growth barely offsetting the price decline for his product. While commiserating with him, I said lower input costs must be a boon, because commodity prices have fallen even more sharply than output prices. He grudgingly agreed they had helped. When asked about his profits, he eventually admitted they were at an all-time high. But nevertheless, he said, we need safeguard duties because foreigners are dumping below cost! Put differently, businesspeople complain about low output price inflation, but the inflation that matters to them is the inflation in their profits, which is higher. For instance, analysing 2nd quarter results for non-financial non-government corporations, we find that while revenues have fallen by 8.8% year on year, input costs have fallen by an even higher 12.4%, so that gross value added has gone up by 10.8%.
Clearly, there are industries in trouble. We should, however, be particularly careful about raising tariffs at a time when costs are falling everywhere – aside from the inflationary impact, for every happy domestic businessman whose prices are raised by the imposition of tariffs on imports, we have an unhappy domestic businessman whose costs are raised by the very same tariffs, as well as unhappy consumers.
For full text of the speech:http://scroll.in/article/802737/ful...cial-reforms-and-perils-of-debt-driven-growth
