Some time back, Avataram had written a post on India’s economy which I had decided was the most insightful one I had read. That post disappeared in one of Nilu’s regular purges. Now, he has written a post that draws on the same idea, but fails to make sense because small rhetorical excesses add up to contribute to a large absurdity.
First, yes, there are two Indias, but $15,000 as the cut off is absurdly high. Rounding it to 10 lakh rupees, it excludes all software developers with less than 3 years of experience and all call centre employees. Which leads to the question of who is actually included.
Then, he claims that while this India is enjoying 15% wage hikes, it is also suffering an inflation rate of 15%. This fact would be astonishing if true. It would mean that all those who are providing services to this rich India are also experiencing a wage inflation similar to what the rich are experiencing – because, after all, what is a cost for me is revenue for my shopkeeper. That is hard to believe, because the whole problem with the current boom is that there are entry barriers to being rich, while there are no entry barriers to serving the rich. India’s population means that the huge supply of labour will keep costs for the rich low.
Of course, it is inevitable that the rich experience higher inflation than the poor, but the only way Avataram’s number can be in the range of being reasonably correct is if his consumption basket overweights housing.
Then he says that the interest rates set by the RBI mean a negative interest rate for the rich – this might be true. But a simpler explanation is: the interest rates set by the RBI have no impact whatsoever on the wages and consumption of the rich, because the wage inflation is driven by investments by foreign capital which is to a large extent unaffected by RBI’s interest rates.
Again, Avataram’s point is not incorrect if he is talking only of housing and loans that finance consumption – like personal and housing loans. So the post is an elaborate way of saying: The rich are buying houses. Because the stock of houses in suitable localities is limited, the prices of houses are rising. This gives them an illusion that real estate is a good investment, and this further fuels house purchases. The RBI cannot cut off this boom by hiking interest rates, because their wages are rising fast, and investments that pay for these wages are immune to RBI’s interest rates.
This is a real problem, but the solution to this problem will be unveiled on January 10th.