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Understanding Dosa Economics: Raghuram Rajan's Theory Explained

If you're like most people, the word "economics" doesn't exactly make your mouth water. In fact, it can be pretty dry and boring. But this concept is far from dry and boring. Dosanomics is a term coined by Raghuram Rajan, the former RBI governor of India, to describe the effects of inflation on individual purchasing power. In other words, Dosanomics is all about how rising prices affect our everyday lives. Keep reading to learn more about this fascinating theory.


What is Dosa Economics theory?

Photo by Anil Sharma on Unsplash


Context


What Is Dosa Economics or Dosanomics?

Dosa Economics is the only economic theory that makes us salivate when we talk about it. Unfortunately, the idea has very little to do with our desire to eat dosas right away. Rajan was governor of the Reserve Bank of India during a difficult time when interest rates were high but inflation was also significant. Despite his several unpopular measures, when looked at in the context of the economy as a whole, they were beneficial and helped to curb inflation.


When inflation dropped to 5%, one of his decisions that got a lot of criticism was reducing interest rates on fixed deposits from 10% to 8%. Many individuals criticized the government's decision because fixed deposits (FDs) are still a popular investment choice in India. It's also the main source of income for many seniors, or the only source of income. When asked why he made such a choice, he responded that it was due to dosanomics.


Dosa economics advocates that high-interest rates during high inflation do not profit investors as much as low-interest rates during sluggish inflation. The idea behind the theory is to describe how inflation affects a person's purchasing power. Let us look at this another way, using Raghuram Rajan's example.


Take, for example, a retiree who only receives income from interest on fixed deposits (FD). If the interest rate offered by banks is 10% and inflation rates are both 10%, the senior citizen may save Rs. 1,00,000 over a ten-year period. At the end of ten years, he will earn an income of Rs. 10,000 if he invests Rs. 100,000 in an FD.


Let's pretend that the senior citizen is from India and that he or she only enjoys having dosa and plans to eat it exclusively for that reason. In the example, masala-dosa is priced at Rs. 60. The senior citizen in this scenario will be able to purchase 1666 masala dosas right away since he has sufficient funds in hand after considering the interest earned on his fixed deposit.


Let's suppose the senior citizen waits till the end of the year in which case he will receive Rs 110,000. However, with inflation, masala dosa costs would have risen to Rs 66, so the senior citizen may only purchase 1,666 dosas. Is there any advantage to the senior citizen as a result of this?


Not if he is purchasing the same amount of dosas in a high-interest, high-inflation scenario.


Dosa and Senior Citizens: when rates are lowered

Let's assume the senior citizen can get 8% interest rates from banks and inflation is at 5%. Again, if the elderly person purchases masala dosas right away, he will receive 1666 dosas. But if he waits until the end of the year, his total will be Rs. 108,000 while the masala dosa will cost.


He will now be able to purchase 1714 masala dosas at the end of the year, which is a substantial difference. When inflation rates are kept under control and low, individuals benefit. According to this viewpoint, Rajan has also remarked that he has yet to meet an industrialist who doesn't want the price of oil to be reduced.


Concluding thoughts

Dosanomics is a fascinating economic theory that takes into account the effects of inflation on an individual's purchasing power. The theory was coined by Raghuram Rajan, who is a former governor of the Reserve Bank of India. Dosanomics advocates that high-interest rates during high inflation do not profit investors as much as low-interest rates.


Furthermore, as investors, the most crucial thing to consider is the return. However, we may overlook other significant elements that are also at play. Likewise, the theory also explains how inflation may be a silent killer if it isn't recognized since it reduces purchasing power.