Who’s afraid of inflation?

Who is afraid of inflation? Not the country’s 350-million-strong urban middle class and upper income group. The fact that high prices are having little bearing on the urban demand or consumption patterns shows that inflation has little impact on the size and depth of their pockets. In fact, the pocket size seems to be deepening at a faster pace than the inflationary dig-in. The continuously large fund flows, some accounted and others through other sources, into the pockets of the urban middle class and upper income group in the last 10-12 years, has made the inflation impact calculation on the population reasonably wrong and difficult. A 1,000-sq.ft apartment in the nice middle-class suburbs of any of the metropolitan cities – Delhi, Mumbai, Kolkata ,Chennai, Bengaluru and Hyderabad – that would cost a buyer around Rs. 25 lakhs to Rs. 40 lakhs, 10 years ago, is now selling between Rs. 1 crore and Rs. 2.5 crore. And, they seem to be selling like hot cakes. More ultra-modern condos are coming up everywhere. Their buyer-end costs vary from Rs. 1.5 crore to Rs. 4 crore or more. The middle class housing demand is constantly growing so is its per unit cost. If all those condos are not always fully occupied, it is because increasing number of buyers are taking them to hedge their wealth against future inflation, park black income, create new assets and, finally, feel high and richer.

Thanks to highly-innovative, habitually greedy builders and better and faster commuting options in cities such as metro rail, mono rail, new road bypasses, flyovers, etc, the city limits are constantly expanding. If Mumbai has gone beyond Navi Mumbai, Marole, Kandivli, Ulhasnagar and Nala Sopara, Delhi and its national capital regions (NCR) is expanding on all sides – from Greater Noida in UP to Manesar in Haryana. Hyderabad’s new airport has nearly doubled the city limit. Bengaluru has rapidly expanded to cover old villages Jalahalli, Marathahalli, Hebbal, Kengeri, Krishnarajapuram and till almost Hosur; Kolkata to Barrackpore, Narendrapur, Rajarhat, Joka and Batanagar, and Chennai to Guindy, Perambur, Meenamvakkam, Tambaram, Ennore and Nadamvakkam. Money is pouring in. Property prices skyrocketed over the last 10 years. The velocity of monetary expansion during the 10-year financial-and-land-scam-tainted Congress-led UPA regime had beat all decade-wise records since independence. It was a decade of builders, contractors, suppliers, agents, land and mining mafia- from coal-iron-ore-minerals-rich Jharkhand to Goa and Bellary in Karnataka- business and political opportunists.

The country is flooded with currency, largely unaccounted, the circulation of which was neither in the control of the indulgent UPA government, nor its puppet central bank, the Reserve Bank of India. So much so that the government shamefully dumped small coins as useless. The middle-class, bureaucrats, politicians, corporators, police and regulators had their share of the big black booty. The onslaught of the highly-expanded unaccounted money could not be sustained by the existing market. What followed was a staggering inflation, especially since 2007, and erosion of the domestic purchasing power of rupee. Increasing demand for and supply of imported luxury, gold and branded life-style products, home decors, wine, sexy white female-escorts and entertainers, expensive cars to under-wears led to increasing deficit balance of trade (BoT) and balance of payments (BoP). 

Resultantly, Indian Rupee (INR) heavily lost its exchange value – from Rs. 38 for a US Dollar to Rs. 64 over this period. As if to promote extravagence, the UPA government relaxed the FDI policy allowing invasion of the market by single-brand retail traders to extort the fund-flush Indian consumers. Café Coffee Day was soon outclassed by more expensive hot and cold non-alcoholic brew such Starbucks, Costa Coffee. The Indian organized retail industry became one of the fastest growing sectors for foreign brands with huge growth potential. According to leading global investment consultancy firms, the total retail market in India was estimated to reach USD $573 billion by 2012-13. Till 2007, the organized retailing accounted for less than 5 per cent of the total retail sales market and was projected to reach 10 per cent by 2012. So flush is the Indian middle-class with funds that this large section, which would outnumber the total population of each of the member country of the European Union, or even the United States or Russia, that they are prepared to pay the same or even higher price for locally-sold foreign brands- from coffee, ice-cream, biscuits to men’s or women’s wear and cars. Even high-end Indian brands and outlets are taking advantage of these bindas, care-too-less new generation Indian spenders.

Thus, the so-called tirade against inflation would appear to be mostly political, a vote-bank politics for the consumption of the unorganized lower income group, which could number around 550 million, leaving the children and unemployable senior citizens out. Even among the latter, not all seem to feel the pinch of inflation. Those living in remote, poorly connected villages and spend 60 per cent of income on food articles have, fortunately, gotten used to higher prices of their bare necessities – mostly locally produced – for which they pay one-fifth or one-tenth the price the middle-class urbanites shell out to pay local vendors. They may be unhappy, but not complaining as much as they should although most of them could be seen talking in the air almost all the time over cell-phone using pre-paid card facility, the use of which too exploded during the UPA regime.

Everyone likes to talk in India, not necessarily on a serious subject like inflation and the impact of Governor Rajan’s monetary policy. One has to visit both the wholesale and retail markets, however, to witness the practicality of the ‘price equilibrium’ theory of economics. In cities, if one accounts morning market arrivals and takes stock of those commodities before the day-end, one will witness ‘arrival=departure’. Nothing is left behind – be it a bundle of Rs. 250-plus-per-kg coriander leaves or Rs. 80-per-kilo red tomato, as if they are price-inelastic commodities. Ironically, for reasons that should call for a serious micro-economic research, retail prices of agri-commodities in most metro markets across rule mostly at uniform levels, irrespective of the distance they travel from the farms of their origin, somewhat of like printed MRP on packaged products. To control inflation, the authorities must find a way or ways to check the circulation of the ever-increasing unaccounted money supply with the public, other than reverting to a highly repressive regime that could lead to a total economic crash. Top global monetary economists, media-columnist Nobel laureates, could be engaged for the purpose. In its latest study, British Standard Bank has said that the middle-class population of 11 key sub-Saharan African states, excluding South Africa, is set to explode to triple by 2030, leading to consumption boom in the region and they would be complimented by a swelling lower-middle class. The countries are: Angola, Ethiopia, Ghana, Kenya, Mozambique, Nigeria, South Sudan, Sudan, Tanzania, Uganda and Zambia. Maybe, a study on how to control circulation of unaccounted money will be of some help to them.