how will india's escalating price rise be controlled?
DESCRIPTION
As India's great middle class struggles to keep pace with the escalating price rise, here's an examination of it's causes, and some possible solutions.TRANSCRIPT
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HOW can !PRICE RISE !
be controlled?!!
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The Analysis
The Analysis
Controlling Price RiseThe price of the typical basket of goods used by the common man,!The Consumer Price Index… !!
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…has risen by 300% in the last 15 years.
1999 2014
Source: Ministry of Consumer Affairs, Govt of India
The Analysis
Controlling Price RiseBut we all realise that in recent years,!Some goods have become costlier … !!
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but some goods still cost a similar, or even lower amount.!So what drives prices?
Education
Cell phones
Refrigerator
Televisions
Laptops
Homes
Groceries
Petrol
The Analysis
Controlling Price RiseThe Demand Supply Equilibrium drives Prices!Price is the level at which Sellers (supply) … !!
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and Buyers (demand) are willing to transact.
Supply: 2
Demand: 2
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The Analysis
Controlling Price RiseHow Demand Supply Mismatch drives Prices!When increase in rate of Supply, is more than the Demand rate!!
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the Price goes down.
Supply: 4
Demand: 3
) ) ) )
The Analysis
Controlling Price RiseHow Demand Supply Mismatch drives Prices!When increase in rate of Supply, is less than the Demand rate!!
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the Price goes up.
Supply: 4
Demand: 6
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The Analysis
Controlling Price RiseBut what drives Demand and Supply?!Demand rises when…
1. People have more money!(better income / more Govt subsidies)
2. People have more cash!(RBI prints more notes & Govt spends)
3. People change consumption!(so some goods are more in demand)
Maruti!Mercedes
Motorcycle!Maruti on EMI
Scooter!Motorcycle
The Analysis
Controlling Price RiseBut what drives Demand and Supply?!Supply stagnates when…
1. Production capacity increase is restricted!(due to licensing, lack of land / power / labour / etc.)
2. Goods produced are not what people want!(Rice overstock at FCI, but no proteins - milk, dals, eggs)
The Analysis
Controlling Price RiseBut what drives Demand and Supply?!Supply stagnates when…
3. Producers and Intermediaries hoard goods
4. Productivity of many industries is not increasing sufficiently
The Analysis
Controlling Price RiseEXAMPLE 1!
Home prices and rents in cities have gone up because…
Increased Demand due to increased demand from more people moving to cities and higher aspirations!
Supply constraints due to multiple permission requirements, Builder cartels, Input (steel, cement) cost hikes (due to limited capacity)Hence the AskHOW Questions!How will more land be made available? !How will infrastructure like roads, water and sewage be provided? How will artificial shortages created by builders be dealt with?
The Analysis
Controlling Price RiseEXAMPLE 2!
Price of diesel has gone up from below Rs 10/ltr to over Rs 50/ltr in the last 15 years*!
The increase in international prices The increased cost of each dollar per rupee
Hence the AskHOW Questions!How will petroleum and transport costs be controlled?
* Source: http://in.reuters.com/article/2010/02/04/india-fuel-prices-idINSGE6130E720100204
India imports most of its petroleum based fuel and prices have risen because…
Taxes
Increase in diesel price increases cost of transport of all goods.
$$ $$
The Analysis
Controlling Price RiseEXAMPLE 3!
School education costs have gone up because…
People’s preference has shifted from poor quality Government schools, to better Private schools!
Rules and regulations restrict number of new schools, so existing schools get away with charging more fees
Hence the AskHOW Questions!How can quality of education in Government schools be improved? !How will starting of new schools be made easier, so that students have greater choice?
The Analysis
Controlling Price RiseEXAMPLE 4!
Vegetable prices have gone up because…
People’s demand has shifted from cereals to vegetables, as people become less poor
Govt’s Minimum Support prices seen as a safer option, so farmers prefer to grow cereals instead of vegetables
Hence the AskHOW Questions!How will farmers be encouraged and educated to grow vegetables?!How will the monopolies of mandis as compulsory buyers of farm produce be eliminated?
Mandi monopolies and Trader cartels restrict supply of vegetables so that they get higher prices
The Analysis
Controlling Price RiseEXAMPLE 5!
Television and computer prices have come down because…
Less restriction on production as there is no licence required to produce these goods, so scale economies achieved
Import of items and components possible, so supply has kept up with increased demand
Hence the AskHOW Questions!How will regulations be similarly minimised in other sectors?!How will healthy competition be fostered for the benefit of the end consumer, in other sectors too?
Competition among producers has meant that they have passed on cost reduction to consumers
The Analysis
Controlling Price Rise!
Also, prices of many items go up when the amount of money available grows at a rate higher than justified by increase in production of goods. !!
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More money is chasing the same goods, !so the price of goods goes up.
The Analysis
Controlling Price RiseFor example… !
In the year 1998, if we produced 10 units and had Rs 1000 in circulation …
* Source: RBI
1998
The Analysis
Controlling Price Rise!
In the year 2013 we produced 28 units…
* Source: RBI
2013 - 1998
The Analysis
Controlling Price Rise!
In the year 2013 we produced 28 units, but had Rs 10,700 in circulation!
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Then is it surprising that most goods cost a lot more?* Source: RBI
2013
The Analysis
Controlling Price Rise
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But why this oversupply of money?!The main reason is the Government borrowing from RBI.
The Analysis
Controlling Price Rise
When the government spends more money than it earns through taxes, the gap (called fiscal deficit) is met by borrowing from people and from RBI (which prints money).!The one big cause of Inflation then, is the fiscal deficit of the central and state governments which averages at 7.7% of GDP.
RBI
Hence the AskHOW Question!How will the government bring down fiscal deficit?
IN CONCLUSION!
Please Ask your Lok Sabha candidate
Creative Partner MeriMaaCineMAA
How will restrictions to production (land, licenses,
investments) be removed to encourage supply?
How will Government encourage investments in specific areas like schools
and food cold chain?
How will competition be encouraged so that producers reduce production costs and
sell at optimal prices?
How will Government spending be managed to
cut fiscal deficit?
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