The Scourge of Inflation in India

Reports released in the Indian media yesterday screamed that the headline inflation has reached an eight month high of 7%. But with ever increasing prices, soaring monthly expenses, spiralling cost of living, the inflation felt by the common man in India in much more than 7%.

http://timesofindia.indiatimes.com/business/india-business/Inflation-soars-to-8-month-high-of-7/articleshow/25750139.cms

Let’s first see what inflation is....Inflation is the year-on-year (Y-O-Y) or the month on month (M-O-M) increase in the prices of goods & services. Thus inflation is the change in the prices of goods 7 services in a country or an economy over a period of time. An inflation of 8% (Y-O-Y) means that a particular product which used to cost Rs. 100 in Nov 2012, now costs Rs. 108 in Nov 2013. In India, we have two inflation indexes, i.e. the Wholesale price Index (WPI) & the Consumer price Index (CPI). According to the current WPI, the inflation is 7%. This is because WPI is not a correct indicator of inflation as the index does not include many essential articles. The CPI or the consumer price index suggests something very different. According to the CPI, the inflation is more than 10%. Also there is food inflation data which suggests an 18% increase (y-O-Y). This means that the food articles which were available at Rs. 100 in Nov 2012 are now available at Rs. 118 in Nov 2013.

Now let’s see how it impacts the people..... Let’s assume the monthly income of an individual is in terms of percentage.i.e. 100% or 100 units. Earlier, this individual after deducting household expenses & other necessary monthly expenditure used to save 20% of his salary. Out of this 20%, a ten percent could be spent on aspirational or comfort goods say TV or cars or a foreign holiday. Now with an increase in inflation or increase in the prices of the products & services, this individual will save a lesser percentage say 12%. This means that this individual now has only 2% to spend on the comfort items. Thus spending of people is impacted, which in turn impacts the GDP of the country as the spent amount is reduced. Also it impacts household savings of the people as the same amount of money is now buying less. Also, this individual will now invest less as he has lesser money at his disposal.

Thus right from consumption to household savings to an economy, everything is hampered. Inflation at best should not be more than 3-4% for any economy. But the current Indian inflation of 10% (CPI) index could  spell doldrums for the nation if not addressed urgently.

6 Reasons Why Indians Love Gold...

India is the largest consumer of gold in the world. Since ages, Indians have a love affair with the yellow metal. Annually, about 700 tonnes or 33% of the total gold mined in the world is consumed in India. That also makes India the largest importer of gold. Majority of the world’s jewellery consumption happens in India. The percentage of the world jewellery consumed in India is the highest. A normal middle-class household buys about 18-20 lakhs of gold jewellery in a life time.

Reasons for the love affair—

     1.       Experts regard gold as the best asset class & the best vehicle for an investment purpose. Over the years gold has not only given fabulous returns but has also served as a hedge against inflation. Over the last 5 years gold has been successful in offering the best returns as compared to any commodity. Looking at a period of last 5 years which saw the collapse of several banks, the Euro zone crisis & lot of other disturbing series of events, gold has emerged the best asset class for investments.

2.      Also, in India there is a lot of emotional value attached to buying of gold. Gold offered in small denomination coins is considered ideal for gifting. Gold is considered to be the medium to reinforce closeness of relationships. Gold is gifted to newborn babies & also, the married couples. Gold is bought for the purpose of wedding, for gifting purpose, for corporate gifts & for stamping a seal on the relationships, new or existing, gold is largely used as a preferred medium.

3.      Over the years gold has gained significance as it lends itself as a commemorative medium to various engagements like golden jubilee, gold medals, golden anniversaries. Also, a gold credit card seems to get a lot of attention.  Anything associated with gold  perceives to add a lot of importance to the said engagement.

4.      In India people tend to buy gold at anytime. They do not restrict buying only to special occasions like festivals, weddings, or any special events. Festivals like Dassera & Dhanteras  are considered the most auspicious to buy gold. The price quotient for the yellow metal is considered to be secondary for these days.

5.      One of the most interesting reasons for this love affair is that Indians consider the yellow metal to be highly liquid. Not only do they term it as a hedge against inflation, but also for exigencies. Gold can be converted to liquid cash anytime & people feel that gold is their best friend.

6. Gold is passed on down from one generation to another & along with the real estate has remained the safest investment over decades. This explains why India is the largest consumer of the yellow metal.