Marshall- Learner Condtion

DOSA ECONOMICS BY RAGHURAM RAJAN

DOSA ECONOMICS 30 jan 2016

Raghuram Rajan has the simplest explanation of how inflation hurts the rich and the old

For much of his tenure as the governor of the Reserve Bank of India, Raghuram Rajan has focused on one thing: Taming India’s sticky inflation problem. At the same time, he has come under pressure—from the government and industry—to slash key interest rates and kickstart growth. On occasion, the governor has obliged with rate cuts, but with an eye still firmly fixed on the inflation numbers.

Delivering the C.D. Deshmukh lecture at New Delhi’s National Council of Applied Economic Research on Jan 29, Rajan made a strong case against “weakening the fight against inflation.”

“Let me reiterate that macroeconomic stability relies immensely on policy credibility, which is the public belief that policy will depart from the charted course only under extreme necessity, and not because of convenience,” Rajan said. “If every time there is any minor difficulty, we change the goal posts, we signal to the markets that we have no staying power. Let me therefore reiterate that we have absolutely no intent of departing from the inflation framework that has been agreed with the government.”

Then, the former chief economist of the IMF launched into a quick round of “Dosa economics”—to better explain the impact of high inflation. Here’s an excerpt from his lecture:

Industrialists grumble about high rates while retirees complain about the low rates they get today on deposits. Both overstate their case, though as I have said repeatedly, the way to resolve their differences is to bring CPI inflation steadily down.

Let me explain, starting with the retiree. The typical letter I get goes, “I used to get 10% earlier on a 1 year fixed deposit, now I barely get 8%”, please tell banks to pay me more else I won’t be able to make ends meet”. The truth is that the retiree is getting more today but he does not realize it, because he is focusing only on the nominal interest he gets and not on the underlying inflation which has come down even more sharply, from about 10% to 5.5%.

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 sympathize 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, analyzing 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.

You can also check

click 

EMPLOYMENT TRENDY IN INDIA

Employment trends in India from SHIBA SHANKAR PATTAYAT

GENERAL KNOWLEDGE MARCH 2015

GENERAL KNOWLEDGE MARCH 2015

CLICK HERE

MONEY AND CAPITAL MARKET

MONEY MARKET AND CAPITAL MARKET REFORMS IN INDIA

More presentations from Nirupam

FISCAL DEFICIT IN INDIA

FISCAL DEFICIT IN INDIA

Fiscal deficit in india from akhilareddy176

IMPLICATIONS OF TRIPS AGREEMENT ON INDIA

 IMPLICATIONS OF TRIPS AGREEMENT ON INDIA

MAIN THEME OF RESEARCH ARTICLE

The Uruguay Round (1986 – 1994) was the turning poi nt in the history of Intellectual Property Rights. This round included the Agreement on Intellectual Property Rights under which minimum uniform laws are to be carried out. The Agreement on TRIPs came into force on 1 January 1995 and is to be implemented over a six-year period ending 31 December 2000 for developed countries and over a ten-year period ending 31 December 2004 for developing countriesIndia has always remained committed to the WTO and in every sphere; it has stood by those commitments. Going by such commitments to the WTO, India has amended its Intellectual Property Laws. Apart from meeting WTO obligations India has placed this new regime due to its economic rational. It enables pioneering firms lead time to recoup sunk cost on research and development1. India is ranked as the fastest emerging economy and a major global player in the years to come. The country has the largest scientific and technical human resources among top five countries in the world. India cannot afford to remain in isolation, disregarding the norms of international intellectual property rights convention. A careful consideration is equally essential in the future interest of macro-level development.

TRIPs was one of the most contentious issues in the Uruguay Round of multilateral trade negotiations, which was concluded in 1994 at Marrakesh. As a member of the World Trade Organisation (WTO), and having signed the General Agreement on Tariff and Trade (GATT), India has agreed to comply with all the instruments and annexes of GATT, including Trade Related Aspects of Intellectual Property Rights (TRIPs).Because of WTO, India has to amend its intellectual property laws .India was forced to comply with the TRIPs agreement. After the formation of WTO in 1995, the India being its member has to implement the TRIPs agreement in toto. The commitment under TRIPs agreement compelled India to amend its intellectual property laws. India has implemented the TRIPs by amending its intellectual property laws mainly patent thrice.

FOR MORE CLICK DOWNLOAD