dosa economics

Raghuram Rajan’s Dosa Economics


Read Time2 Minutes, 20 Seconds

In 2013 while handling the post of Indian governer the well-known economist Raghuram Rajan proposed a theory named “Dosa economics”.

Rajan said, “pensioners are demanding for high-interest-rate”. But according to him, they are unaware of the fact about there purchasing power, they can buy more even in the less money in the hand. So he demonstrates this fact with the help of famous south Indian dish named ‘Dosa’.

Raghuram Rajan said that suppose if one retired pensioner has 1,00,000 Rs and ongoing interest rates are about 10%. If he wants to buy a dosa which is of Rs 50. So he can buy a total of 2000 dosas.

But if he wants to get more then he puts his money into fixed deposits for one year and from ongoing interest rates, he will get 10,000 Rs. after one year.

At 10% inflation rate price of one dosa will be now Rs 55. So now he can buy a total 182 dosas of Rs 55.

For the different case of interest rate 8% he will get 8000 interest on his principal. But at 5.5% inflation rate the price of one dosa will be 52.75. So he can buy 152 dosas approximately.

So the pensioner will frustrate that he is getting less number of dosas.

After one year he will get his principal back from that 1,00,000 rupees he can buy so at the inflation rate 10% means at price 55 he can buy total 1818 dosas and for the second case of inflation rate 5.5% he can buy 1896 dosas at price 52.75 Rs.

So in the case of high inflation and the high-interest rate he can buy total 2000 dosas while in the second case he can buy 2048 dosas in low inflation and low-interest rate. He can buy 2.5% more in another scenario.

Moral of the story is, sometimes lesser money buys you more and at times, even more money fails to offer you things in adequate quantities.

But there are some flaws of this theory because have you ever seen that the price of any food dish is going up and down according to the inflation rates?

In our case, the technology to make dosa remained constant and no disruption has been made in the making of dosa so far. Whereas the hike in wages of the cook determines the prices of Dosa.

The wages always increase when there is no possibility of a cheaper replacement. Whereas other sectors like banking are experiencing tremendous technological improvements which broadened their servicing capabilities and reducing the costs to a major extent.

The wages always increase when there is no possibility of a cheaper replacement. Whereas other sectors like banking are experiencing tremendous technological improvements which broadened their servicing capabilities and reducing the costs to a major extent.

Increasing inflation of food dishes is the main problem in India. And Dosa economics can be helpful.

Also Read: How demonetization has affected India, looking back in 2018


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