"dosa economics." Here is how Dr Rajan explained his point:
"Say the pensioner wants to buy dosas and at the beginning of the period, they cost Rs. 50 per dosa. Let us say he has savings of Rs. 1,00,000. He could buy 2,000 dosas with the money today, but he wants more by investing.
At 10 per cent interest, he gets Rs. 10,000 after one year plus his principal. With dosas having gone up by 10 per cent to Rs. 55, he can buy 182 dosas approximately with the Rs. 10,000 interest.
At 8 per cent interest, he gets Rs. 8,000. With dosas having gone up by 5.5 per cent, each dosa costs Rs. 52.75, so he can now buy only 152 dosas approximately. So the pensioner seems vindicated: with lower interest payments, he can now buy less.
But wait a minute. Remember, he gets his principal back also and that too has to be adjusted for inflation. In the high inflation period, it was worth 1,818 dosas, in the low inflation period, it is worth 1,896 dosas. So in the high inflation period, principal plus interest are worth 2,000 dosas together, while in the low inflation period it is worth 2,048 dosas. He is about 2.5 per cent better off in the low inflation period in terms of dosas".
Dear Rajeev Dwived
Greetings,
Please find the attached file about your topic may be useful for you ,
Best Regards
Thanks for your sharing. However, i am asking opinion of individuals on inflation situation, interest rates and other issues addressed by RBI Governor in India.
Dear Dr, Dwivedi,
I agree with you that in advanced economies, and Prof. Truman Bewley has marvellous papers on this, there is a concept of the optimal rate of inflation. I don't think India is that sophisticated structurally, so Dr. Rajan is absolutely right in my opinion. He being a very Finance person has shaped our monetary policy very judiciously, being placed at the RBI, and that means that our black market reduction policies have worked quite well too. Earl Prof. (University Institute Chair) Dr. (D.Phil.) SKM QC EPS Fellow (Indirect) MES MRES MAICTE
Dear Prof. Dwivedi,
Are you still interested in the answers to your question ? Because I have something more to add. Which is that on every parameter India has developed over the last twenty five years since adopting the liberalisation and the globalisation regime simultaneously, which as we all know was first introduced by the Congress govt. with the advice of the IMF, World Bank and ADB to the extent such a big structural change policy is advised by them. We have benefitted to a large extent because of it. However, we have not been able to keep pace with our own policies. The helter skelter gold imports by the private sector, the overt emphasis on transport investments and the accelerating oil imports, all point towards an irrational cushioning of our private lives dictated largely by our middle class apparatachik in which the upper castes and the big industry dominate and all imports using USDollar and Pound Sterling, which set us up against the formidable powers of the US Economy and we fell flat on our Rupee-Dollar exchange rates. You have to notice that we are doing rerasonably well with our exchange rates with other big currencies. I personally think that our Business Class and Our Government Class (Castes if I may say so all inclusive) have allowed their youth and lack of knowledge and experience and over emphasis on particular modes and vehicles of consumption and investment and irrationally concentrated on expensive and economically difficult markets which have improved our finance sector considerably at the cost of failing our monetary and government sector miserably. If only we had started our globalisation before our liberalisation policies by taxing income, wealth and estattes and gifts at a higher rate and made our rupee even stronger than the 20 Rs. to the Dollar or so it was trading in 1988, I think we could have done much better. I in fact wrote a PhD thesis at NYU in 1993 in which I showed the imporetance of income and wealth taxation and education and health being firmly in the control of the central government, before financial liberalisation can be introduced. Perhaps it was a little too late. So now we are somewhat like Russia having oligarchs competing with oligarchs. But the good sign is that our SENSEX is growing and so is our GDP. These will help to maintain our globalised liberalisation position at our Hindu majority level. We should diversify I think and save and create more productive assets at our new gained democratic market freedom, I don't think we will be liberal enough to respect each other's utility functions without avarice, or at least be able to choose our family's future through and through. Earl Prof. (Sir Ashutosh Mukherjee University Institute Chair Professor) Dr. (D.Phil.) SKM QC EPS Fellow (Indirect) MES MRES MAICTE
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