Inflation: The Real scam on the salaried and the deposit holder

The most important parameter of an economy that a common man senses is the inflation rate of the economy. Ask any household what is the one thing they worry about from a macro economic perspective, they would reply that it is inflation. But as with everything else the UPA led central government performance on tackling inflation has been dismal.

Source: World Bank

Inflation is a very corrosive element that slowly chips away real wealth from the population. Inflation affects almost the majority of the population and only a few really gain from high inflation. But two set of people are really affected badly by persistent high inflation, they are a) Salaried, b) Deposit holders. Now, of course Inflation affects traders and businessmen but since they play on the margins of their products and services, they can relatively better adjust to high inflation levels with losing out in terms of real wealth.

Effect on Salaried Class

Let me explain how Inflation corrodes the purchasing power of salaried class. Let us take the case of typical IT employee who has just graduated from an engineering college. His typical annual salary would be around the range of 200,000 INR to 300,000 INR. Let us take as an illustrative example take two brothers who have graduated from the same college and landed up with similar jobs. But the elder brother graduated in 2009 and the younger in 2012. Now if the starting salaries in nominal terms have remained the same at 300,000 INR annually. Then it might appear that they are receiving similar wages but in fact the younger brother is being under paid in real terms. This is because the due to inflation, prices of majority of commodities would have increased and hence the purchasing power of 1 Rupee would be lesser in 2012 as compared to 2009.

To find out how much exactly, we need to discount the salaries to a common year, let us take 2009 as the base year. Then their salaries in terms of 2009 value stands to be

Person	Salary	Inflation adjusted salary (Base:2009)
Elder brother	300,000	300,000
Younger Brother	300,000	207,348

These numbers have been calculated using the inflation rates that persisted in India between 2009 and 2012. The relative drop in wages of the younger brother is whopping -31%. Hence we can clearly see that Inflation has robbed the younger brother’s purchasing power by ~31%. Thus in real terms his wages have actually been reduced and he is being underpaid as compared to his elder brother. In simpler words, if on 2009 the elder brother could buy 3000 Kgs of tomatoes priced at INR 100 per Kg, the younger brother would find that he could buy only ~2000 Kgs of tomatoes with the same salary, as the price of tomatoes have risen 44% cumulatively. This is exactly how inflation corrodes purchasing power of salaried people. Hence the present UPA government has been the real bane for salaried class. It has economically exploited their earnings ability and in real terms has made them poorer than what they were in the beginning of the UPA term. The cumulative drop in purchasing power during the entire term of UPA I & II of a regular private sector salaried employee turns out to be a whopping 51%. So effectively, the central government has halved the income earning capacity of regular Indians in its eight years of mismanagement of the economy.

Effect on Deposit holders

Every bank deposit holder earns interest on his deposit. This interest is to compensate him for two factors i) to compensate him for the loss of value of money over time due to inflation and ii) the other to compensate him for partaking his money now and receiving it at a later time. The nominal interest rate, hence is equal to the sum of inflation rate over the period and the real interest rate for the same period.

R_n = I + R_r

But ordinary deposit holders are not aware of this fact. They primarily are taken by the returns offered by the nominal interest rate, while in reality they should be worrying about the real interest rate their deposits are earning.

Real Interest Rate R_r = Nominal Interest Rate R_n – Inflation rate I

Let us look at what depositors have really earned in the eight years of UPA government.

 Source: RBI, World Bank

In the above figure, I have plotted the real interest rates for 1-3, 3-5 & >5 year deposit rates derived from the Nominal interest rates in the respective years. I have also mentioned the average Real interest rates during the NDA, UPA I and UPA II periods.

	Average			Cumulative
	NDA	UPAI	UPAII	NDA	UPAI	UPAII
1-3yrs	3.9%	-1.9%	-1.2%	21%	-9%	-4%
3-5yrs	4.9%	-1.5%	-1.1%	27%	-7%	-3%
>5yrs	4.8%	-1.5%	-0.9%	26%	-7%	-3%

We can clearly see that the real interest rates, in the entire UPA tenure have been negative, while in the NDA regime, it was positive. The implication of this is that, if you had deposited INR 1, 00,000 in 1999, at the end of 2004, you would have earned INR 1,27,000 during the NDA regime. On the other hand, if you had deposited INR 1,00,000 in 2004, today the real value of the deposit would have been INR 90,000. In other words you would have suffered a loss of INR 10,000 (10% of the value of the initial deposit) during the eight years of UPA I&II rule. The contrast is stark, during the NDA regime, wealth is created while during the UPA regime, wealth is systematically destroyed.

I have obtained the total deposits in banks and other financial institutions during the period 2004-12. 

INR Bn	2004-05	2005-06	2006-07	2007-08	2008-09	2009-10	2010-11	2011-12
Demand	2870	4074	4776	5784	5887	7180	7229	7049
Term	15959	18931	23421	28620	35351	41134	48658	56250
Total	18829	23005	28197	34404	41238	48314	55886	63299

Source: RBI

Calculating the interest loss on these deposits based on the 1 year term deposit rates and prevailing Inflation rates, the cumulative loss on deposit holder in the UPA regimes comes out to be INR 3, 80,213 Crores. The loss in UPA I stand out to be INR 2, 67, 796 Crores and in UPA II, INR 1, 12, 417 Crores. This loss is bigger than the INR 1, 17, 000 Crores presumptive losses in 2G. Sadly no one seems to bother about this. The irony of the whole affair is that this loss on deposit holders is real, in terms of their wealth and income capacity while the loss in 2G and Coal-gate are nominal.

Hence the mismanagement the economy has really eroded the wealth of common citizen. Whatever the finance minister says, ordinary citizens have not gained from the so called economic growth witnessed in India. On the contrary, ordinary citizens have been at the receiving end of this corrupt and maligned government, whose sole purpose is to loot the wealth of the Nation through various scams and monetary dole outs to win elections. The loan waiver scheme is a prime example, where it solved nothing but only ensured UPA’s return to power. Hopefully people wake up, and rid themselves of this corrupt regime.