 Hello and welcome, you're watching News Made Easy, I'm Anandya Chakravarty and today I'm going to talk about one big headline that has come out over the past 2 years and that is the rise in retail inflation. That is the prices that you and I pay for our everyday life and that includes things like food, it includes the transport costs that we have, includes housing in urban areas, it includes our children's education, health and all kinds of miscellaneous expenses that we have, the doctor's visit and also things like clothing, the shampoo you use. All this on an average has gone up by 6.3%. Why is that important? For two reasons. Number one, the RBI's mandate more or less, the Reserve Bank's mandate more or less is to control inflation. And they have always said that we are okay with an inflation band of 4% to 6%, which means that if last year, I think on an average a person spent 1000 rupees, if they spend 1040 rupees which is 4% or 1060 rupees within that range, we are okay with that because that is required for growth. But we don't like it if it crosses 6%. So it's again crossed 6% retail inflation. The consumer price index based inflation has gone up by 6.3%. Now in a normal year and we've not had normal years for a long time right now and some of you might not have ever experienced it. But when your salary is going up, right, you work in a good decent company and you're doing well and your salary increases by 10%, 15% every year. Sometimes you get even a bigger increment, sometimes you get a big bonus. What happens when that happens? When that happens, basically you don't really look at prices. So you go to a department store and you say, oh there's a foreign raspberry jam that I really like to have raspberry jam. I'm going to buy this and you don't even look at the price. You just put it on the counter and you buy it. Now what happens that you go for that Kisan mixed fruit jam because you need to save money. You don't have that huge salary hike. In fact, in the last one year, what has happened? People have lost jobs. They've taken pay cuts even if they've had this, their job has been secured. They've not had an increment or at least their bonus has been held back. They've been told we'll pay you later when the economic situation improves. Yes, the economic situation has not been great and corporates have made money by cutting your salary largely. So they're not going to pay you that. So here's the important part. When your salary doesn't increase, what happens? Well, inflation hits you doubly badly. So let's assume that you are in a well-placed middle management kind of position in a big corporate firm and you earn well, you earn about a lakh a month, which puts you straight there in 0.51% of earners in India. And you spend 80,000 rupees every month. You have a house rent, you have a car, you have EMI to pay, you have some people working for you at home, you pay children's school fees, doctors, bail, everything put together. You spend about 80,000 rupees and 20,000 rupees you save saying that, okay, I need this for my retirement. I need it for future education of my children, maybe for some health emergency, maybe to upgrade my home later on. Who knows, right? So you save 20,000 rupees. Now, this year because of COVID from 2020, your company comes and tells you, well, you know, you do a great job. We're not going to sack you, but we need you to take a pay cut. So here's a 10% pay cut, not much, but at your level, this is what you have to do. So 10,000 rupees gone from 1 lakh, you've now come to 90,000 rupees. All right, you were spending 80,000 in any case, so you're okay. If actually the economy is going down, you would expect there to be disinflation. Prices might actually go down, so you might more or less stay at the same real income. But what has happened is that your salary has gone down from 1 lakh to 90,000, but 6.3% inflation for you means for 80,000, your expenditure has gone up to close to 85,000 rupees. Earlier, remember 1 lakh minus 80, you were saving 20,000 rupees. Now what has happened? 90 minus 85, your saving has gone down to just 5,000 rupees. So what are you going to do? When inflation goes up like that, you're going to curtail expenditure. You're going to stop buying things that you would have otherwise bought. You're going to defer any big expenditure that you thought of, maybe buying a new TV or upgrading your fridge, right? You're not going to do that because you don't have the savings. You have to increase your savings right now, so you're going to cut down on spending. So this is the first part. It hits you, retail inflation. The second part comes from wholesale price infection. Who buys wholesale goods? Well, sometimes we go to Sardar Bazaar and maybe get it at wholesale prices, but generally we don't. The retailer buys it and sells it to you. Wholesale price index has gone up by 13%. 13%, right? So something that costs 100 rupees last May costs 113 rupees now. Okay, there is a base effect. Last year prices had dropped when the lockdown started. So what cost 100 rupees in May 2019 went down to close to 97 rupees in May 2020 and from there it has risen again. 13% is not a minor number, right? So it's pretty high. What is going to happen? It takes some time for that to push into our costs. The first place where it hits is people who make things. They buy inputs. They buy raw materials. So raw material prices are going up and when those raw material prices go up and when transport costs goes up because of fuel prices and this is entirely induced by the government, by the way. They could have kept fuel prices low. They haven't done it. When that happens, it gradually leads to be passed on to consumers. So what we buy has already been produced in the previous cycle, right? The factory has produced it and is pushing out. Right now, especially after COVID lockdown has been gradually opening. A lot of inventories in stock has been sold. So it's at previous prices. Now as the costs increase for corporate India, what happens? They're going to pass it on to you. So inflation is not going to go down. It is most likely, as most economists are saying, going to stay above that 6% level. It's going to stay in that range. So this is the problem. If it stays in that range, your prices keep increasing and if demand reduces, as I told you, if prices go up for you and your income doesn't go down, you're going to stop buying things. And then corporates won't be able to sell. So they'll sack more people. They'll cut more salaries. They'll reduce wages. That's what they're going to do. They're going to contract even further. So the economy is going to spiral into a lower circuit compared to what it was in the previous decade. So we're seeing a downward circuit taking place, partly driven by inflation, partly driven by a lack of demand. There is one single thing that has been driving it. The biggest single thing that has been driving it is fuel prices. Fuel prices, the government has chosen to raise taxes instead of giving us fuel prices at what market rates should have been. The government decided that taxing fuel is the best way forward and that is showing up in inflation. The second part is that we have not recovered. We are still under lockdown and as long as vaccination takes a long time, these lockdowns will keep repeating. And because our economy has not recovered, whereas the rest of the developed world, the rest of the big economies are expanding and recovering, including China, prices of raw materials are going up. And as prices of raw materials are going up globally, the costs for Indian corporates are going to go up. So that cost push will continue to exist for manufacturers, for service sector, for everyone. Whereas people like us, whose income will continue to drop, will not be able to buy things at higher prices. So we will continue to reduce our demand. So this is a vicious cycle that India's economy is going to find it very difficult to come out of.