A very irate 70-year-old spoke to me sometime back about his bugbear with the inflation stories he was reading in the papers. The inflation numbers had just been announced and the papers had stories about the rising real return on deposits. The stories celebrated the fall of inflation leading to positive real returns. This means that an inflation number of 4% and a deposit rate of 6% gives a ‘real’ return of 2%, as against an inflation number of 8% and deposit rates of 6% giving a negative real return of 2%. People don’t understand that they are better off, said the stories and comments, they just see the lower nominal return and feel poorer even when they are not. “It’s not as if the price of milk or vegetables has come down,” the septuagenarian grumbled. He’s right. The bite of inflation is such that even when inflation numbers go down, it just means that prices are still rising, but not as fast as before. What the commentators forget is that inflation too has a compounding effect. If compound interest on savings makes our money grow faster, the compounding of inflation makes our money buy less and less. For a retired person sitting on a fixed pot of savings and living off its interest, falling rates of inflation also mean falling deposit rates and that means insufficient funds to live on.
You and I are really important to the country. Did you know that we are the human shields that protect the nation? Against bank failures, against financial exclusion, against insurance exclusion, and against starvation of insurance agents.
While working on the Swarup Committee Report a couple of years back, I had reason to go fairly deep into the arguments presented by many parts of the retail financial market—the product people, the sellers, the regulators, the government itself. It was then that I realized the value of each one of us who finally has to pay for badly constructed financial products, skewed markets, one-sided contracts and regulatory gaps. If we were not going to buy the cost-heavy life insurance policy, for instance, how would India’s insurance penetration rise? The meat on the bone left for the industry and the sellers was meant to encourage penetration. Of course, we won’t go into why, after 50 years of meaty bones, the penetration is still nearer zero than 100. If we were not going to pay the obese commissions, how would lakhs of agents run their homes? If we were going to protest mis-sold products by our bank that never sleeps, some poor relationship manager was, gasp, going to see his career run aground. He would carry a lighter bonus sack home. Oh! My! God! (Yeah, I’ve been watching Friends on the 3G stick.)