April Fool's Joke

My Dear Fellow Salaried Friends and Other Honest Tax Paying Individuals,

One of the main highlights of today's budget speech delivered by our very own Honorable Finance Minister (as is done every year, irrespective of the political party in power) was the announcement of tax sops for individuals in form of bigger slabs and consequent lower taxation. This single event would have lifted the spirits of all, me included. I even started to calculate the savings and new expenses that I could make out of the saved taxed. Leading websites claimed it as power to the aam aadmi. People in my office and nearby were in joyous discussions about the amount they would save and where they would spend it. So much joy around and from someone who is as unrelated to you as the ruler of a foreign country set my skeptical nerves in action. What's wrong ? And that is when I realized this: We are being returned a fraction of the money that is taken from us by the way of inflation. Somebody realized that too much would expose their modus operandi. Here's how.

Let's take the example of a salaried person, who has say an annual package of Rs 6Lakhs (Cost-To-Company). Going by accepted norms of salary structure in the IT industry, that person would be taking home somewhere close to Rs. 4 Lakhs in net taxable income after deductions. According to existing tax slabs for 2009-2010 (Assessment Year 2010-2011), the income tax amount for this is Rs. 34,000 (10% * Rs 1,40,000 + 20 * Rs 1,00,000). Since the basic tax free slabs have not been raised, we can safely assume that the net taxable income for the same salary would remain same in the forthcoming year also. So given the new tax slabs the income tax for the same taxable income is Rs. 24,000 (10% * Rs 2,40,000). So a savings of Rs 10,000 per year. Awesome figure you would agree !

Now comes the interesting part. As any mildly conscious person would know if there is one thing that kills all your hopes and dreams it is Inflation. Did you ever realize that that is also a tax that the governments put on your earnings (besides multiple other excise, octroi, services, sales, VAT, GST, etc. etc) ? Let's consider the inflation numbers as given to us by the moneylender of last resort - 7% (although I have full faith that you as a conscious breathing eating living human being know that the actual number is more than that). So if we are to beat inflation we must earn at the least 7% more next year, right ? Which translates to Rs. 42,000 (7% * Rs 6,00,000). Compare that to the Rs. 10,000 savings you got out of your tax sops.So just by inflation our governments take away our money from us.

Given the recent high inflation across all countries, somebody clever realized that too much of it might invite too many uncomfortable questions. So lets give these fools something to cheer about. So they gave you Rs. 10,000 back. And you know which date this new round begins - April 1, 2010. Enjoy!

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By the way, you are not spared if you are living in India or any other developed/developing nation worldwide (except for countries like Austria, Switzerland, etc.)

Inflation and Expenses

Everybody has variably heard of the word inflation. As a matter of fact, any educated person would like to rattle off his/her knowledge on inflation, and with the current market news (maybe I follow it a bit too much) its all over. So here's a small peek into what is it and how it affects us.

Inflation: In simple terms it is the phenomenon due to which the little orange candies which used to cost 10paise each back when I was a kid at school, now cost more than 50paise (on a conservative estimate). Or the onion butter masala dosa a south Indian delicacy that used to cost a mere Rs 13, would now cost somewhere in the region of Rs 20 to Rs 25.

How does inflation affect me: Due to inflation the cost of every goods or service that you buy goes up. And you are not spared, whether you are spending in dollar, euro, yen or the rupee. It affects all commodities and makes them dearer every year. So in general the price of petrol/ diesel you buy at the pump goes up every year.

The amount of real return earned by keeping money in the bank goes down. For example, given the current real scenario in India, the interest rate offered in a normal savings account hovers around 3.5%. While with the recent released figures, the inflation hovers around 5% and above. If we were to assume that today you have Rs. 100 which would purchase you a cake at the Barista, then due to inflation next year the same cake would cost you Rs. 105. But since you chose to eat the cake next year, and kept the money in the bank, your money grew to only Rs. 103.5. And so you don't have enough money to purchase the cake anymore.

Are there any standard measures: In India, inflation is measured by the Wholesale Price Index (or the WPI) released by the Reserve Bank of India(or RBI) every Friday. Check under the Database -> Weekly Statistical Supplement and select "Index Numbers of Wholesale Prices". The WPI is a more broad based measure than the variably used Consumer Price Index (or CPI) used by other countries, or many other measures. The WPI numbers released for India include on the upwards of 435 item prices and give a good picture of the overall price rises.

What is the extent of the affect it has on us: Year to year, there is hardly any effect that an individual may feel. In fact with increasing efficiency in some spaces, prices may actually go down in some categories of goods, most notably technology products. But in the long run we all get hurt by inflation. Even if we assume a modest average inflation figure of 5% per year, in 20 years the cost of any good is bound to grow by 2.65 times. So we need to plan our savings in such a manner that we beat atleast that figure.

Why is there inflation: Economists vary regarding all the possible factors affecting inflation. But some of the most common reasons are

• Increase in the price of goods due to increase in demand in excess of supply available. This also gives rise to ocassional black market.
• Increase in money supply due to government/ central bank policy. Sometimes if the government sees that there is not much spending by the consumer, it may reduce interest rates to encourage the consumer to borrow and spend. This decreases the value of money, and companies increase the selling price to keep the value that they earn the same. This in turn pushes up prices.
• Higher interest rates. Due to this the cost of purchase of raw materials or labor increases for the business which may be passed onto the consumer. This effect may not be seen immediately, but is over the long term prices rise/fall to match interest rates.

Any other information: Yes. There are two more terms that be mentioned in the context. They are deflation and stagflation. Plus there are other terms like disinflation, reinflation and hyperinflation, but of lesser significance.