Inflation Problems? Majority of Indians should not worry: Finance Trading Times

Inflation Problems? Majority of Indians should not worry

Usually the opposition targets Dr. Manmohan Singh - the PM of India, and his cabinate, for problems of inflation and economic issues going out of control. The justification that comes from the government is that things are driven by markets, things are driven by demand and supply, things are driven by international prices and hence there is not much the government can do about it.
There are a lot of examples that shows that government has been unable to tackle the increasing costs - be it sudden rise in the onion prices (as well as the prices rise of other vegetables), the cost of pulses, the hike in petrol rates, etc.

However, on the front of inflation, I am with the government and will completely take their side - especially for the justification that inflation has increased because people are earning more and more. Inflation
Unfortunately, we all see small clips of the statements made by government ministers on news channels. What is lost in these small clips is the context of the entire statement. We all know how well the Indian media behaves and what all is cooked up for breaking news (see example here - of "Responsible News" covered by Indian Media)
In this article, I attempt to highlight the cause of inflation in India and how it can be attributed to the increase in earnings of the individuals
First of all, we need to understand the various "financial stratas (layers)" that exist in the Indian society. Indian society is not a clear 3 layer society where you can clearly define people in 3 categories - poor, middle class and rich.
Indian society has many layers in financial terms - extra poor, very poor, poor, lower middle class, middle middle class, upper middle class, richer middle class, rich, richer, extra rich, super rich, really rich and so on.
Depending upon the (undefined) category you belong to, you have your spending power.

What the government ministers are trying to convey, and not being understood by the people, is that the earning power 9and hence the spending power) of countrymen has increased and hence the demand has increased and so the inflation is going up.

Let's understand this with a simply example.
A family of 4 lives in Mumbai in a 2 BHK rented flat. Father is around 45, works in a govt job and has a fixed salary. Mother is a housewife - no income for her. Son has just completed his engineering and has started earning - no plans to marry for atleast 4 years. Daughter is completing her 12th and looks forwards to getting into medical/engineering college. Typical Indian middle class family and here is how things progress.

Son has just started earning. Before that, the family was able to meet all the expenses from the father's fixed salary. So this salary income of son is "extra". What to do with this extra income now?
Spend or invest. The son has seen his parents toiling hard throughout their lives. He knows how they brought him up. So being a good son, he wants to keep his parents happy. Now with his salary income, he might start buying things for them. First it will be the necessities - clothes, mobiles, a new two wheeler - but this time a lot better. Why better? because he has extra surplus money. But better comes at a premium - at a bit higher cost. However, with the surplus income, he or the family doesnt mind paying extra.
The same family which used to buy clothes from local retail cloth shop, has now started visiting high end supermalls. The shirts for which cloth was purchased for 200 and stichting would cost another 200, making it a total of 400 Rs. for a shirt, are now being purchased from Shopper Stops, Lifestyles, Westsides or Pantaloons at a premium of 1200 to 2000 Rs. The grocery which used to be earlier purchased from local kirana shop with some bargaining, is now being purchased from Reliance Fresh and More, again at a premium. The vegeatbles which were purchased from the local subji mandi at lower prices with bargaining, are now being purchased from Fresh and More. So basically, the spending power has increased. With extra money, family is spending (and willing to spend) more, for the same commodities.

After these necessities (say after 2-3 months of salary), what to do now with the extra income?
Time for some big investments. How about buying a car? If few months salary is not sufficient, then there is car loan available.

Have been living in a rented apartment. The service of son has made him eligible for taking a big amount of home loan. Why not book a bigger flat on loan and move to a better high-end living?

The family which use to have problems with just 2 Rs petrol price hike, is not minding even if the prices are shooting up 5 times in a year.

This is what typically happens when earnings increase. The above example talks about only one family. We all know very well that today, every tom, dick and harry walking on the streets, is able to secure an engineering or mca degree and able to get a job in atleast a BPO. Am not implying anything in lack of skills or hardwork, but am mentioning the ease of getting educated (getting a degree), getting a job, and getting salary and hence extra pay leading to extra spending.

Why are the airconditioned supermalls running successfully? Because there are customers who are willing to pay extra for the same stuff which is available for cheap at a retail shop. Still, people want to buy from the supermalls at high price.
Why are the vegetables and grocery retail chains running fine? Again people are willing to pay more
Petrol and diesel prices are increased several times - do you see any fall in car sales or bike sales? No - infact, the sales have increased. Why? the people have more earnings, more money, and hence more purchasing power. Dont you know that many two wheelers and four wheelers have waiting periods for months? Because the demand is high.

Go to any Reliance Fresh or More store in a bit late evening. The IT and BPO workforce returning from the offices will be there. Even if the gates are going to be closed, they will beg for an entry at 9 or 9:30 PM at night. Even if the left over potatoes are not of good quality, they will pick up the best of the worst from the leftovers in these stores at the closing time. However, the same people will not buy good quality potatoes from a roadside vendor for the reason unknown to them - probably buying leftovers at high prices from a a/c superstore is a status symbol, but buying good quality stuff from roadside vendor at cheaper price is not.

Right from the small daily commodities like potatoes to high end luxuries like cars and houses, the demand is more and more.
This is what leads to high demand. And when the demand is high and supply is limited, the prices are bound to rise. And that leads to inflation.
Now think about it for a moment and ask yourself what can the government do for such price rise.
Honda Activa, the famous scooter has a waiting period of more than 6 months - Why? because people are willing to line up for that - high demand. Even after you buy it, to get it serviced in a metro city, you need to take an appointment 4 days in advance. Still people are willing to go for it. People will not be willing to purchase the readily available Scooty, Wego, Rodeo. Why blame the government for price rise?
The problem is with perception - we need high income, but we can't accept high cost. The same guy will not mind going to a movie in a multiplex for a ticket costing 300 per seat, snacks at Rs. 150, parking charges at Rs. 50. But if the housemaid working in his house at salary of Rs. 1000 asks for 100 Rs. raise, the same person will be upset.
It is for us to understand and accept that nothing in this world comes for free. The growth in income which we have seen, will lead to price rise. No point in complaining. Rather we should feel happy to be able to live such lavish lifestyles, despite high cost, just because of our high incomes
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