Should We Care About Inflation in India?

You work so hard to earn money. And then you dump it all in a place where you lose its value day-by-day. The real danger of inflation is not the fact that its increasing at such high rate, the real danger is that it happens slowly and quietly that its often ignored. Since the number in your bank account is same and its even increasing with the interest rate. You feel you’re able to save and grow your money. However, if you are a realist and care about your money, you should at least know how much inflation india has witnessed in the recent years.

Let says you got a 10% hike in your salary this year. However, the inflation in your country last year was 12%. I’m pretty sure you’ll feel much better in this case as compared to the other scenario where you take a 2% deduction in salary when the inflation is zero. In reality, the impact of both the cases are same. I don’t know how much your salary increases per month. I also don’t know how much percent return you generate from your investments. However, what I do know is that inflation steals away your purchasing power. The impact may not be visible in the short run but it is indeed clear in the long run.

“Indians are getting stronger. 40 years ago, it took 2 people to carry 10 rupee worth of grocery. Now, a 5 year old can do it.”

Current Inflation Rate of India

Just to give you a hint, inflation in Indian economy has been rising at about 7.7% per year (average from 1969 until 2013). Now, this data is as per the official statistical records of central bank. Yet, I think the actual inflation is much more higher because the government will always try to show a better picture to people. As quoted by this genius:

“Lies, damned lies, and statistics.”

Mark Twain

Even for the sake of argument we go by the official records to be on the conservative side because it cannot be lower than 7.7%. The question in your mind would be that why should we care about inflation in India? When your salary or income is consistently growing.

India ranks among one of the top countries when it comes to high inflation rate. USA has an average inflation of about 2-3%. This high inflation is due to various reasons. We can discuss the reasons some other day. However, we’d like to discuss the impact of this high inflation to common man.

But if you’re either a salaried person or do not invests money in equity related instruments like mutual fund and stock then you should worry a little bit. Because the effect of inflation is not felt in short term. Its always felt in long term. Remember this keyword: effect of inflation is felt in long term“.

The Impact of Inflation

Since nobody is taking any money from you and you can count it easily. The number is still the same (in your bank account or on your payslip). Its easy to overlook this factor and most of us do. However, the real effect of inflation is felt in the long term (usually in 5-10 years or more), when the inflation rate is compounded. The persons who are most impacted are salaried employees and the ones not investing in equity linked instruments. You can check the list of investment options available in India here.

Let’s say you can buy an apple worth Rs.100 today and you decide to save this money in your savings account at the rate of 4%. Next year when you want to buy the apple, the price will be more than 107% (as per the average inflation) and you’ll not be able to buy that apple with your savings of 104 (100 + 4% interest). Which technically means you have lost the purchasing power by not investing your money in the right place.

Government do not want to have a 0% inflation or lower than that. They always targets a positive inflation rate due to various reasons. If by any chance the inflation rate falls, central banks can and will print money out of thin air. Which means the money you saved in your bank is always losing its value.

Now lets analyze who gets impacted the most

There are two parties in any economy. Businessmen (or owners) and workers (or employees). Business owners have no limit on income, as we know its usually based on the sales and price.

To understand the impact of inflation, lets think from a different perspective. Who is the party that never gets impacted no matter how much the inflation is? It’s the businessmen! They have the power to increase the price as and when the general market prices go up.

Lets say the inflation rate in your country spiked suddenly to 12%. Your employer will only give you a raise as per their company standards or as per your performance. Your fixed deposit will only give you a fixed return of 7 or 8%.

However, the goods or services that were sold to customers was at higher prices. Hence all the extra profit goes into the pocket of the owner. We must not forget that there is no limit to inflation and similarly there is no limit to the income earned by businessmen.

When the inflation in your country runs at 10% and you get a salary hike of 10%, it’ll be foolish to increase the standard of living just because the salary has increase. In real terms, your purchasing power has remained the same.

Now as I mentioned earlier, its easy to overlook this factor of inflation in our lives because our income is generally higher than our expense. And we generally do the spending first (which is not the right thing to do) and the money that remains from our expenses goes to our saving account. The person who can understand the impact of inflation immediately are the ones who earns on daily basis or whose full salary is consumed for their expenditure completely. They’ll be able to gauge the impact immediately. You must have heard this song from the movie Peepli Live:-

“Sakhi Saiyan Toh Khoob Hi Kamaat Hai,
Mehngai Dayain Khaye Jaat Hai“

Where do we invest to achieve better results to beat inflation

Let’s talk about the options that I prefer not to invest in.

Gold: If you’re investing in gold, you generally get an average return of about 7-9% annually. Which is just as the inflation rate in India. 1000 years ago, 10 gm of gold could buy you a beautiful dress for your wedding. Today, the same 10 gm of gold can buy you a wedding dress. 1000 years in future, it is going to do the same. Nothing more, nothing less. A little gold for diversification is good but not for investment. You can read my detailed review of gold as an investment option here.

Fixed Deposit: Then there are people who save and invest in fixed deposit. We all know the return provided by fixed deposit in India is approx 6-8% and that too after a locked in period of few years. Now that you know the inflation rate of India, you can calculate whether you’re really investing.

We must understand the fact that fixed deposit is a product of bank and they’re making money when you buy their product. You can read my detailed review of fixed deposit as an investment here. I personally think fixed deposit is one of the useless way to parking your fund. There are more disadvantages then advantages.

Savings account: Keeping a huge amount in savings account is a big mistake. Lazy and ignorant people do it. There is a huge opportunity cost for just keeping your hard earned money idle. Unless you have an emergency fund parked in it, than its alright.

“How many millionaires do you know who have become wealthy by investing in bank accounts? I rest my case.”

Robert G. Allen

Let’s talk about the investing options that beat inflation

Real estate is a good option which has given better returns in the long term. But the problem is not many can afford to buy a house or a flat with small savings. Buying home with a loan is I think one of the worst mistakes one can ever take in life. Only if you have a huge fund to buy the property outright, its a good choice.

If you really care about inflation in India then you should be looking at alternate investment options so that the purchasing power of your hard earned money is retained.

Stock market: As I mentioned earlier, all the extra profit due to inflation goes into the pocket of the owner. You have the opportunity to become a business owner. You can do so by buying the shares of the company. However, investing in stocks is quite risky because people get into speculation by just looking at stock price and do trading.

However, if you’d really want to become an owner of the corporation then you can buy the shares of the company you believe in and hold for long term. You’ll have higher chances of creating wealth. If not, then read the next option.

Mutual Fund: Investing in Mutual Funds or Index Funds through SIP (systematic investment plan) is I think one of the best investment options available to common man. You can read more about it here.

Even Warren Buffet – the greatest investor and one of the most richest man in world has suggested Index Funds for general public. Because you can invest in it with as low as Rs.500 monthly and become a co-owner of the company with no hassle.

At least once in our lifetime, all of us wish to start our own businesses. But due to lack of skills, idea, resources, motivation, we somehow fail to start. 

In that scenario, the second option, would be to buy a piece of existing businesses. 

How? Through Stocks and Mutual Funds. It’s that’s simple. 

Conclusion

More than 99% of elders above 65 are failing financially. Only those who had invested in real estate or equity related instrument were able to retire peacefully. My point of this blog is to educate you so that we don’t come across a sad situation that after a retirement of 45 years of service, you’re left with no wealth.

This is why I always say poor people plan Saturday night and rich people plan next 3 generations. You can read the example of lottery winners who became poor in few decades again because of lack of financial education.

Investing is not risky, being financially uneducated is risky.

Saving is one habit, investing is another. I hope I was able to shed some light that its not just savings that will help. Investing in the right place is equally important.

At the end:

“It’s not how much money you make, but how much money you keep, how hard it works for you, and how many generations you keep it for.”

You can check the list of investment options available in India here.

That’s all for today. If you found it useful, do not forget to share your opinion in the comment section and share this post with your friends and family.

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