A few friends of mine came together to start a new venture. They set
aside a corpus to provide for their families before chasing their dream.
It seemed like a good idea and they did quite well in the first two
years. However, they closed down abruptly a few days ago just as they
were poised to take off. The reason: inflation. Their families simply
could not cope with the rising prices and uncertainty of income to allow
them their entrepreneurial indulgence. They were comfortable, upper
middle-class households, which, one would assume, are not hurt by the
rising prices of milk, eggs and fruits.
Inflation
has manifested in the middle-class households in areas other than the
bare necessities. The cost of education from pre-primary to college
level has soared. Not only are private colleges and schools seeking
exorbitant fees, most families incur additional expenses on coaching,
extra study material, tests, subscriptions and books.
The cost
of buying a house across major cities is beyond the reach of most. They
either pay a very high rent, or have taken loans to buy a house, mostly
in the suburbs. The EMI is the biggest draw on a family's income. The
next big drain is in the form of transportation expenses to commute to
school, work and social outings. Several maintain multiple vehicles,
from cars to a bike per adult family member.
The rate of
inflation that applies to just these three major costs of Indian
households is not the rate that the government publishes. It is far
higher, and in many cases, higher than the rate of growth in
household
income. The proportionate share of these expenses in the household
budget is increasing with inflation, leaving less for other expenses
and, importantly, for saving and investment. Worse, households end up
spending tomorrow's income today, taking loans to fund these expenses.
Since the assets they buy on loan do not contribute to their income, at
least not immediately, they find themselves in a debt trap. They live in
anxiety about the adequacy of income to meet increasing expense levels.
The underlying cause for the uncontrolled inflation in the key
consumables of the household is the failure of the government to do its
job. Providing good quality public transport, ensuring that real estate
markets are not skewed in favour of developers and builders,
constructing quality educational institutions to meet the growing demand
of a young population is the responsibility of the government. Private
players offer these services at usurious costs to meet the demands of a
growing middle class, which aspires to move up the ladder and secure a
higher level of income. If policy action is needed to help households
manage inflation, it is in building the infrastructure that the growing
middle class needs to manage its monthly budgets efficiently.
There is an alternate argument. It says that the
RBI
and, subsequently, the banking system should reduce interest rates.
This is expected to make money available for businesses to invest in
producing what the households demand, while also enabling them to borrow
for their homes, education and vehicles at a lower cost. This is
expected to increase the production of goods and services in the system
(what is measured as GDP growth) and bring down the prices eventually.
There are risks in trying to do this when infrastructure is not in
place.
It may be difficult for low-cost funds alone to build
useful infrastructure if bottlenecks exist. The mushrooming of
low-quality and high-cost engineering and management colleges across the
country is an example of what lack of policy initiatives can do.
Players with no background in education have set up institutions with
the singular aim of making profits. The cost of education has moved up,
while employability of the graduates who pass out has been dropping.
Educational loans have soared, but have become a high-risk venture for
banks as repayment by graduates who are unable to find employment is
becoming tough.
Low
interest rates also fuel speculative booms in real estate, which add to the woes of a household. Classic
financial planning
advises households to resist from taking loans, and to save and invest
to meet financial goals. In a scenario of high inflation in essential
goods and services that a typical household consumes, not only does
saving become tough, but borrowing also moves up. How can one fight this
inflation without waiting for the government to fill up the obvious
gaps?
