Dear friends, you will all agree that a
healthy economy is the backbone for anyone’s success. In any practice, any
service and any enterprise, success in one way or another depends on how
vibrant the economies around the world are.
Of late, many people ask me why the
economy is unstable along with fears of potential inflation and recession in the
United States, the lead player of the global economy. In this blog, I would
like to touch upon a few points about the global economy which may have an
impact on the Indian economy.
Now, what does a recession mean? A
recession means a period of temporary economic decline during which trade and
industrial activity are reduced, generally identified by a fall in GDP over two
successive quarters. Inflation is related to the prices of goods and services
going up, and obviously every government will need to face the wrath of the
common man when price increases.
Most people believe you need luck to be
successful in business. In India, it is not uncommon to find people who perform
a puja for good luck on their computers, for the stock market to go up,
for the economy to always remain in their favour and so on. What we really need
is proper planning and a strategic approach.
I believe in my own theory of economics. It
is simple.
Let us look at India. Here, it is the
middle class who generally makes a hue and cry about inflation. Why is it that people
living in rural areas dependent on agriculture don’t? Approximately 70% of
India’s population resides in rural India. It is people from these parts that
produce for the rest of the country. You don’t see any agriculture products being
cultivated in and around any developed areas of the country – the Tier 1 cities.
And if at all you do get to see any, it is likely to be grown for export
purposes under controlled conditions.
Let’s come back to the rural economy. What is
the dream of a farmer? Is it to go to a shopping mall? Is it to buy fancy automobiles?
How about a vacation in an exotic location? Or to throw expensive parties?
Really not. For them it is all about their children, roti, kapda aur makaan
– i.e. food, clothing and shelter. A farmer has always taken the brunt in a
zero inflation situation or single digit inflation.
Let us consider the home of a typical
farmer, and pick one of the vegetables they grow – tomatoes. In 2022, the approximate price range for tomatoes in India was between INR 21 and INR 30.58
(or USD 0.25 and USD 0.37) per kilogram.
Today, in the wake of the so-called Tier 1 inflation, let us imagine the price of tomatoes went up
by 10%. This is the luck of the farmer in getting a certain spike for their
produce under the affluent or middle class person’s inflationary situation.
They celebrate when the selling price of their produce goes up. And thus a certain amount of the Tier 1 cities’ wealth gets
transferred to rural India. The same is true for rural areas in any nation.
Statisticians are doing their job in every government
– measuring data and publishing data showing the price index, which obviously
shows an elevated value which is defined as inflation. For central banks of
each nation affected under the inflationary trend, the normal practice is to
raise interest rates. I am completely against central banks raising interest
rates to tame inflation. This directly hurts the farmers in rural areas.
So, people buy less resulting in prices
going back down which hurts farmers and service providers. And the minimal
increment of wealth they created during this spike goes back into cities. With the
current inflation in India, let us imagine if prices of anything have gone up
substantially in rural India. No. They live in the same shack, their wages
remain the same, living conditions are the same and their children still don’t have to pay 1 rupee more for education –
if they have access to education.
Let’s come back to the industrial belt of
India and the lavish lifestyle of city dwellers. Do you think a rich person in
Mumbai will think twice about doing their grocery shopping when they find out that the cost of their basic needs
which is again roti, kapda aur makaan have gone up by 10%? No way. They
won’t care and
will still buy.
Now, let us talk about the luxurious
element. Automobiles, white goods, luxury goods, hotels, entertainment and so
on. Economists still think if the interest rates are
taken to higher levels people in cities won’t go to the cinema, or make a need-based automobile purchase, nor host lavish weddings. Sorry economists. You’re wrong. They will, and they are.
Increased interest rates will not stop even the middle class, let alone the
rich, from spending for a life of convenience. They will still buy goods at
higher prices. The same is applicable to everything.
Let us move on to larger industries. The
interest hike will impact borrowing costs of all businesses – including
exports, which is our fundamental survival tool
in balancing our current account and building the reserves of the country.
Obviously, when an industrial business house borrows money at a higher cost,
their cost of goods go up. What happens when the cost of goods go up? They
increase the selling price, resulting in increased costs in the hands of the consumer
– this is inflation too.
My view on this, is raising interest rates
is not the only tool for taming inflation. The farmer should make a little more
money for their produce, and so should other raw material producers and small
and medium enterprises who supply their products to various manufacturing units
– including heavy industries.
To me,
raising of interests will only increase the cost of production. How does one
mitigate this? Only by increasing the selling price, which again results in the
person who buys has to pay a higher price. To me it sounds odd. Dear policy
makers, we all need to change our outlook from the draconian theories of trying
to control the so-called inflation by unscientific rate increases which will
impact the common man in rural India the most. I hope whoever reads this understands what I have shared.
These are purely my views and not intended to question anyone in my country or
beyond.
If you have any questions, go to ‘Ask JT’ and
leave them there. I will be more than happy to get back to you with answers
from the world of JT-nomics.
I hope you had a lovely Christmas, and wish
you a Happy New year. I hope in 2023 we will all see better days – especially
geopolitically. We all need to pray for Vladimir Putin. For wisdom to prevail
over him so that he stops hurting innocent children by forcing them to live in
terror and grow up experiencing such terrible loss. May this be the year where
we see humanity being restored.