Price for a Prospered India

In the last two to three years, if you dared to ask a middle-income group homemaker about the topmost concerns on her mind, the immediate response would most likely be a string of complaints about the unstoppable rising prices of food, daily consumables, daily commute, children’s education and elders’ healthcare. All of this, she would say, is leading to an unprecedented alteration of the monthly budget, just to keep the ship afloat. With this backdrop, I would like to bring a few points to the fore.

Firstly, there is the interesting coincidence of the nation crossing the all-important per capita income level of Rs.45,000 during this same time period. Historically, such a level has been a strong indicator of an economy entering a different growth and developmental orbit. China has been a visible illustration of this phenomenon for the current generation, as the Chinese growth story unfolded during their own lifetime.

While the focus in such cases usually stays on development, the impact of this growth on inflation in general and on retail inflation in particular are discussed less oft. Although I am not an economist, I would argue that the current inflationary trend is a direct outcome of the growth and the associated higher supply of paper currency, whether as direct or indirect subsidies in the form of food credits or minimum wages—on or off the central balance sheet.

Secondly, the magnitude of these trends can also be understood by what the U.S. president had to say during his recent visit to India. While one segment of India can celebrate the fact that the U.S. president pronounced India to be no longer an ‘emerging nation’ but an ‘emerged nation’, the implications and the inherent messages are deeper than that and have a far-reaching impact. It could possibly mean that Indians should now be prepared to pay in full for their consumption with no apparent subsidization by the countries from which India buys, because India can now afford to pay.

Further, it implies that prices to be paid by a domestic Indian consumer would move in a similar fashion (read upward) as that for a nation that has emerged or developed. A can of Coke, for example, would be priced in Indian rupees by converting its dollar price in an emerged nation (like the U.S.) and applying the exchange rate to that. This also means that during an economy’s transition from ‘emerging’ to ‘emerged’, the prices of goods and services meant for general consumption could undergo a significant change; they could move to a much higher plane that might form the new baseline prices for subsequent decades.

This would probably occur once in 3-4 decades to reflect the state of the economy, its growth, its prosperity, its ability to pay. What general consumers need to note is, arguably:

* India is going through a state of permanent adjustment.
* Inflation will remain high until the adjustments reach a level that becomes the new baseline for prices.
* Expectations for the new baseline prices to break downwards will not succeed.
* Growth will generate enough all-round prosperity to enable absorption of new realities and maintain social balance.

Is this the price India is paying for having arrived and for its future prosperity? I would have to say yes!

The views expressed here are personal.
BHARAT BANKA is the MD & CEO of Aditya Birla Private Equity

Tags:
Bharat Banka, economy, emerging nation, inflation