Dr. Raghuram Rajan’s Dosa Economics Test for NDA & UPA

Dr. Raghuram Rajan gave his famous ‘Dosa Economics’ theory while delivering the C.D. Deshmukh lecture at NCAER, New Delhi on Jan 29, 2016. The gist of the theory is that lower interest rate with lower inflation rate is better than the high interest rate with high inflation rate. For layman or ‘aam aadmi’ or middle class it means low inflation regime is better. To understand more go through this answer posted on Quora, ‘What is Raghuram Rajan’s dosa economics?’

Now let us test the performance of UPA led by Dr. Manmohan Singh and NDA led by Narendra Modi against ‘Dosa Economics theory’. The period chosen is from 2009 to 2018 in which UPA was in power till April, 2014 and NDA from May 2014. Let us assume that cost of 1 Dosa at the start of year 2009 was Rs 20. Also, I had Rs 1,00,000 (1 lakh) at the start of year 2009. It means I could buy 5000 dosas (1,00,000/20 = 5000) at the start of year 2009.

For making calculations simpler and for a better comparison below assumptions have been made:
  1. For UPA tenure, maximum value of FD interest rate for the year has been taken.
  2. For NDA tenure, minimum value of FD interest rate for the year has been taken.
Below chart shows the application of Dosa economics theory. At the end of every year, how much Dosas one can buy is calculated given the FD interest rate and inflation.
End of YearFD Int. Rate (%)Amount (Rs)Inflation (%)Cost of 1 DosaTotal Dosa
UPA in Power from 2009 to April 2014
Intial Amount Rs100000.00 20.005000
20098.25108250.0014.9722.994708
20107.75116639.389.4725.174634
20119.25127428.526.4926.814754
20129138897.0811.1729.804661
20139151397.829.1332.524656
NDA in Power from May 2014 till now
Intial Amount Rs100000.00 20.005000
20148.5108500.005.8621.175125
20158.5117722.506.3222.515230
20167.25126257.382.2323.015487
20176.75134779.75423.935632
20186.75143877.394.8125.085736

 

Another graphical representation
Source:

b) FD Interest Rate: https://www.sbi.co.in/portal/web/interest-rates/old-interest-rates-last-10-years

Explanation:

UPA govt was in power till April, 2014. The initial amount of Rs 1 lakh at the start of year 2009 would have bought 5,000 dosas at cost of Rs 20 per dosa. With the given inflation and interest rate data for UPA tenure; at the end of year 2013, Rs 1 lakh would have become Rs 1,51,397.82 (Rs One lakh Fifty One Thousand Three Hundred Ninety Two and Eighty Two paise). The cost of each dosa rose to Rs 32.52 from Rs 20 and one could have bought a total of 4,656 dosas only.

NDA is in power from May 2014 till now. The initial amount of Rs 1 lakh at the start of year 2014 would have bought 5,000 dosas at cost of Rs 20 per dosa. With the given inflation and interest rate data for NDA tenure; at the end of year 2018, Rs 1 lakh would have become Rs 1,43,877.39 (Rs One lakh Forty Three Thousand Eight Hundred Seventy Seven and Thirty Nine paise). The cost of each dosa rose to Rs 25.08 from Rs 20 and one could have bought a total of 5,736 dosas.

One can clearly see that a person whose purchasing power was 5,000 dosas in 2009, it reduced to 4,656 dosas at the end of 2013 under UPA govt. tenure. Due to high inflation, a person has become poorer by 344 dosas (5000 – 4656).

The same person’s purchasing power of 5,000 dosas in 2014 increases to 5,736 dosas at the end of 2018 under NDA govt. tenure. A low inflation regime has made the person richer by 736 dosas (5736 – 5000).

Even though Rs 1 lakh becomes Rs 1,43,877.39 under NDA which is lower than Rs 1,51,397.82 under UPA; the purchasing power of common man increases under NDA due to low inflation and reduced during UPA tenure due to high inflation. The same is explained by the amount of Dosas one can buy. This is the crux of ‘Dosa economics’ by ex RBI Governor Dr. Raghuram Rajan.

Now, it is up to to the people to decide which govt. is better for them. This is plain Mathematics is neither influenced nor prejudiced. Hence, I leave this up to the better judgement of the people whom to choose during the upcoming Lok Sabha elections in 2019.

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