What you know about inflation might be wrongWhat you know about inflation might be wrong

[podcast]

 

As Indians, we discuss Inflation only during elections which makes it less of transient and more of seasonal!

But, as investors, we discuss inflation a little more. The latest reason for it is the hammering of growth stocks across markets which is blamed squarely on inflation.

In this podcast, we understand the practical concept of Inflation with examples, its impact on your investments, its impact on your daily lives, and how it impacts individuals differently.

We promise, thinking of inflation in this podcast will be much more interesting than what you experienced in your economics class 🤓

Inflation - a basket of expenses

Inflation is nothing but the rate of change of a basket of your expenses. This basket (of expenses) depends on your living conditions, preferences, lifestyle, etc.  Many such variables, that differ from person to person, go into constituting your basket of expenses. This makes Inflation different for each individual.

It is important to understand your own inflation metric and how it may evolve in the future. Living with a generic inflation calculation can be highly misleading as it messes up your financial planning for the future.

A critical problem with inflation calculations is that we extrapolate the past to the future. It's easy and intuitive but it's completely wrong.

But, there is no accurate way to calculate your own personalized inflation metric and get an idea about how it is going to impact your personal finances.

This is when Deepak quips, “It's better to be inaccurate but generally right than to be accurate but generally wrong” while dealing with this seemingly simple but complicated beast.

Listen in to understand inflation as a function of your personal lifestyle and not a generic statistic published by the government.

Real Life Examples of Impact of Inflation

In 2008, FD rates were 10% or so and inflation would have been at similar levels. If you took an assumption of 10% inflation to plan your future, you would be burdened with saving up huge amounts that are not required today (after 14 odd years).

So, you would always need to recalibrate your inflation calculations while going on with life and adjust your savings accordingly. We cover this with examples and scenarios.

It’s not only that your expenses change only for the worse. Technology and advancement have brought a lot of the costs down.

Basically - your expenses depend on the way evolves around you.

We elaborate with practical examples.

• Communications: The costs of communication have come down drastically in the last 2 decades. Deepak would spend 8k to 10k a month on telephone bills in 2005 and now spends 2400 per year. (Yes - we’re as stunned as you are. Tweet to him and ask how did he spend 10k a month on telephone bills!)
• Transportation: Electric vehicles will save your fuel expenses by 80% or so. And, if your city gets metro rail in the next 10 years, it’s even lower. (Deepak dreams of a metro station right at the door of our office ;))
• Environment: There’s enough research that indicates climate change (global warming) will increase farm yields and hence increase the production of food. The population increase will not be as much. So prices of food items are likely to come down. We explore dynamics and examples related to this.
• Dynamics of Businesses: Restaurant rents have come down, thanks to Zomato and Swiggys - because you don’t need a prime location to deliver food. And the same restaurant can serve more customers because it’s not limited by seating space. So the cost of this business is reduced. More such examples of shopkeepers in the retail space and entertainment industry (PVR Vs OTT) - cost per movie is lesser now!

Impact of Monetary Inflation (the bugger in the room) 

Interplay for Interest rates and Inflation is not straightforward. When interest rates change in the USA it directly impacts inflation but that doesn't happen in India. Why?

The impact of change in interest rates does not cascade to the markets as it does in the USA. Again, why?

Deepak explains this concept involving central banks, commercial banks, business environment, and credit cycle in his classic style without using a single jargon. (Don't miss this for the world)

Finally, we wrap up the episode with a lot of food for thought not only saving money but also on spending your earned money.

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Transacript:

Shray Chandra: Hi everyone, and welcome to episode 46 of the Capitalmind Podcast. It's been a very interesting few, I guess, weeks and months in that sense for the stock markets. If you look at U.S. growth stocks where I have some exposure, some of the high growth names that became darlings of the pandemic and really have done well over the last decade, in fact, they're down something like 50, 60, 70 percent. And when you ask, what's the reason? One of the reasons given is inflation in the U.S. is up to levels not seen since the 80s, maybe or something to that effect. And you've seen the inflation numbers come in at 6 percent. People first said it would be transient and maybe it still will be, but it seems to be hanging around a bit and worrying everyone. And I mean, at least has definitely manifested in some stock prices going down. If you look at India, well, inflation has always been with us. We've never really forgotten about it like the U.S. seems to have done for the last 10, 12 years or something to that effect. So inflation has always been a bit of this something in the background or not, so much in the background, depending on the election season that we have to worry about. And right now, our inflation numbers also look similar to the U.S. right, something like 6 percent or whatever. So I guess in today's podcast, we wanted to bring in Deepak and actually sort of ask you to tell us, look, when I look at this inflation, I'm told that this is a core inflation or it may be transient or that this inflation, it has a lot of food or it has a lot of oil. And then when I look at my spending, I don't seem to be able to see that number match my spending. Sometimes my spending goes up year over year, much more and sometimes much less. And you've talked about this quite a bit as well. So Deepak, can you tell us, can we just ignore the government and help us figure out what our inflation is?

Deepak Shenoy: Yes Shray. In fact, I think the interesting thing about inflation is while the number seems to be like 6 percent when you talk about, but that's the inflation that's calculated for, say, the whole country and how it's calculated is more complex than simple. But the idea is that they say, Oh, well, you know what, on average, all of India spends 50 percent on food and on average, India spend so much. But this average doesn't mean that your average because it means you're a different person. Now, consider that inflation is just a basket of spending that you're doing. And this basket is never static, not even for you as a person. If you're spending 20 percent on food today, you may be spending only 10 percent tomorrow. Let me give you an example of where inflation will suddenly rise without any reason whatsoever that is not controllable by you. One, for instance, is let's say you got cancer tomorrow. Your medical bills go up, you're eating out bills come down. You know, suddenly what was 20 percent of your expense is food is now maybe 5 percent because your expenses have increased because of the cancer spend and the other. Let us say you're a couple that is that is currently spending X amount of money and you suddenly have a child, the expenses on a child and you'll discover the real cost of diapers only after you have a child, it is suddenly a lot more. It's now spending for three people.

Deepak Shenoy: Your expenses are different. This is a layer of food and medical and vaccination and all sorts of other expenses that are different from what you used to spend earlier. The child goes to school, suddenly you have a school bill, which was not there for the first 4 or 5 years of his life or her life. And suddenly that school bill is just added to your inflation. Your personal spend as a number is very different. And then there's a deflationary part as well. So, for instance, you're old enough that your child goes out of college or school, and you no longer have to worry about school expenses. The college expenses, maybe you've kept a lump sum for. Your regular spends don't include that amount anymore. Now you're saving, you're spending for 4 people rather than one. And you know, if you move out to a cheaper city or a more expensive city, Bangalore, Bombay, Bombay is more expensive for rent, cheaper for food. Your basket changes the way you spend changes. Because of this, every individual is different, and the way to handle this is to say, Shray calculate your expenses today roughly, you can't do any exact numbers. There are lots of apps that tell you exactness, but most of it is I think it's better to be inaccurate and roughly right than to be accurate and totally wrong. It may be useful for you to just track your overall numbers so you may be spending as a middle-class person today about 1 [00:05:00] to 2 lakhs per month.

Shray Chandra: Upper middle-class person

Deepak Shenoy: Upper middle class spend 1 to 2 lacs per month and, you know, roughly Bangalore person with a small, maybe Capitalmind listeners. I mean, that might be the range of how much you spend and over time, that number, that broad number, how it changes is roughly what inflation you are experiencing. Now to give you an example, I was in a rented house, I still live in a rental house. I was in a rented house about in 2007 and I was paying something like 17000 rupees per month in Bangalore, but it was more towards the center of town. Now I come out, I live in a much better house, a bigger house, but I roughly pay may be only two times that. So in 15 years, from 2007 to 2022 my rental expenses have gone up 2X, which in inflationary terms means only about 5.5 To 6 percent. So in fact, less than 5 percent. But I now have two kids, so the school expenses my first child was probably I mean, it was very, very young at the time. There were no school expenses in 2007. So today from that base, it's significantly higher from zero you might think it's infinity because the base is zero. But even if you took the year-on-year expense on education, I'm probably seeing a 10 percent increase in that. As a percentage of my overall basket, this is actually quite different. What has happened now is the amount I spend on certain things, which I used to spend a lot more in 2007 on alcohol, on partying, on certain other things is a lot lesser. I barely, if anything, you know, if ever drink and we don't go partying.

Shray Chandra: I mean, good luck. You have two kids.

Deepak Shenoy: Yeah. Well, it's just the way it is. But you know, I'm just older and all that stuff so and the stuff I really like to spend on, which is to travel, you know, mostly to go out because people who know, I know that's where I go, but anywhere else as well, the actual expenses on travel have not been significantly higher. Even in fact, to go from travel from India to say Dubai, even an air ticket in 1998 costs roughly about the same as it cost today. In rupee absolute terms, nothing to, you know, including all the other stuff that's added. So it's your basket that determines how much your inflation has changed and the elements of your basket will also change. It's like food was 20 percent at some point, kids were zero and now kids are 20 percent, food is like 5 percent because you're mostly cooking at home. Every person's basket is different and you'll find that your basket gets inadequately represented in the overall inflation numbers and also inordinately impacted when the government changes certain rules. So for a person travelling business class, now at that time, I was not. India suddenly introduced a surcharge on business class tickets, and I was like, Oh man, OK

Deepak Shenoy: Bummer for those who travel business class, but I don't care. So it didn't affect me. But to somebody who is travelling business class and paying for it was like, Oh my God, this is an expense that's increased. For them, that cost has suddenly gone up. So they are seeing that inflation, I am not. The basket of inflation changes on a regular basis. This is very interesting because I think what we're making a critical problem is, is that we're extrapolating the inflation of the past to an inflation that applies to us in the future. Sometimes this is wrong because it underestimates inflation. So before I have a child, if I start to estimate that my expenses will go up by only 5 percent a year, I'm not accounting for the fact that there are going to be more people in my family and therefore I have to, you know, deal with it. It may be the exact other way around when we are largely saving and investing for our retirement. When inflation may come in but it may not be as much as it seems because our basket will change dramatically when we retire, we'll explore that more as we go along.

Shray Chandra: So I mean, I have to say you were saying this is an interesting problem which sounds a bit hopeless to me as an individual, because what we have, as you just described, is a constantly evolving basket. I mean, there are expenses that just don't exist, that suddenly crop up and now are such a big part of it. And then they'll go away in maybe what, 18 or 22 or 25 years or something like that and will just vanish. And will no longer or hopefully will just vanish and will no longer be part of your spending habits. On the other hand, there's all these shocks that can hit you is that you also point out both positive and negative that completely change the picture as well. So I think my takeaway from your first sort of answer is that I guess it really is better to be like, what was, did you call it, imprecisely right than to be precisely wrong or whatever because this is a very complicated problem.And maybe then just to take a step back, why we care to some extent is when you look at inflation and you're like, this is how much something costs today. I mean, we're all, as you pointed out, planning for some retirement or some phase where perhaps you don't need to earn to be able to buy those things. And so you're trying to figure out how much I need and on that. So how should one think about their investments in the context of this ever-changing basket with ever-changing inflation? I mean, how do you think of investments in this context or how do you advise us to think of it?

Deepak Shenoy: I try to always say this, that sometimes we [00:10:00] end up trying to save too much or without an idea of where that goal is. The goal is the money itself, not what it can do for you. But if you change that mentality of saying, listen, I want to save for a certain purpose, I want to save to be able to say this money can take care of me when I retire, then actually what you're saying is my investment should be able to meet my inflationary needs. So inflation base needs. So if I'm spending X a month that X is going to become 2X, then my investment should be able to generate that 2x per month till I

Shray Chandra: Don't need it any more. Ok.

Deepak Shenoy: If I started to invest in 2007, you know, inflation at that time appeared like it would be 8 or 9 percent.

Shray Chandra: Isn't this the era of like what, 10 or 11 percent FDs or something?

Deepak Shenoy: Yes, it was about 8, 9 percent FDs. Maybe 2007 was a little bit lesser. We did in 2008 have 11 percent FDs. Interestingly, if that was the FD rate that you were thinking, you would also thought inflation would be that much.

Shray Chandra: Yeah, why not?

Deepak Shenoy: And you plan for that. And then you'd end up with this hopeless exercise of at 10 percent inflation my spend doubles every 7 years. And in 15 years, I should have been 4X of what it is and another 15 more years till I retire, I'm thinking if I'm 4X of what I should have been in 2007 and I am spending a lakh a month, then I should be spending 4 lakhs a month today and in 15 years I should be spending 16 lakhs a month. Now I'm thinking of this in 2007 when I was not even in my 40s. Here's where you know you start thinking, Oh, you know what? When I retire, I need 16 lakhs a month. 16 lakhs a month is a lot of money.

Shray Chandra: And that keeps growing too right, in this math.

Deepak Shenoy: Yes, in this math. At 16 lakhs a month, I need a corpus to earn me 16 lakhs a month is about 2 crores a year. Yeah, so I need a corpus to earn me 2 crores a year, but it's increasing, so I need 20 crores or 30 crores of a corpus to be able to get there. Now 30 crore is a lot of money, but when in 2007 I'm thinking, listen, that's going to happen 30 years from now. So I'll somehow manage to get till 30 crores. 15 years down the line, I suddenly realize I don't need that 30 crores because I'm not spending that 4 lakhs a month today, and therefore I have to recalibrate. This recalibration helps me because then I'll say, well, you know what? I don't have to chase that insane fortune that I decided was based on inflation of my thoughts in 2007. But it can recalibrate to where we are right now.

Shray Chandra: So I'll just pause you there for one second, which is I think many people have this criticism, including some people in Capitalmind, that when financial planners come to you and say this is how much money you need for retirement, is this hopelessly large number, which means nothing. And then the response, which I mean the math shows you is, well, don't worry about it too much. Just invest in this much in equities, this much in debt, and you'll get there. These exercises, as you say, maybe we think about them in the wrong way or there's more to this, because if you just try and solve it through math, the numbers, they are just play money, it feels like monopoly money at some point.

Deepak Shenoy: Yeah, I mean, at some level you're thinking you need so much just to retirement and then you need something for your kid's education, something for a house, something. So the problem really is that we don't, when we think of inflation as a number, it just seems to be linearly increasing number. But I can tell you this when you're 60, your expenses will change. I don't think my kids will want to stay with me, so I don't have to take care of their living expenses, which is deflationary for me, right? I will probably own my house by that time, in which case I don't have rent to pay, which is a significant amount of my expenses today. So I don't care, I don't have to deal with that. I have lesser mouths to feed, lesser people to plan for when I plan a vacation. Therefore, a retirement expense to me is not, even if I took my linear inflation from here, which is, say X to 2X because it is 15 years from now and I'm expecting only 5 or 6 percent inflation. It might actually go from, say, a 1 to 2 or say, give a number, I'm not giving actual numbers. But they say a number is 2 lakhs per month today that you're spending on, including your vacations and school fees and all that. I don't have school fees, I don't have rent, I don't have the same amount of travel bills that I do. My 2 lakhs will become 4 lakhs if I were spending the exact same basket.

Deepak Shenoy: But because that basket has changed, it's actually I'm going down to coming back to spending 2 lakhs a month, 15 years down the line. So whatever number I needed, I need half of that to be able to meet my real retirement expenses, maybe a little bit more because I want to travel, maybe more times a year than I do today. So roughly speaking, my actual inflation to the point at which I retire is 10 percent. There's another thing if I retire today and this is Deepak Shenoy speaking, but I think a lot of the knowledge economy is like this. It's not like I do a lot of physical labor. I should perhaps, but I don't do a lot of physical labor working. It's the mind, and the mind doesn't really slow down too much. In fact, it gets richer as you grow older. So the chances are that after you're 60, you can continue [00:15:00] to work and people will value your work. So there is an amount of passive income that can also come in or active income that can come in, and this changes your dynamic again. You know what? I saved all this money and then now I still have an income and I don't need it. And people build their income in different ways. They buy a house that gives them a rent, they write a book. I mean.

Shray Chandra: Well you write a book at least? So some of, the rest of us? Not so much. I'll actually go back to that other thread you were saying and then I cut you off, which was about one of our podcast listeners actually suggested this point, which was when you look at, I think you were just getting here that when you look at the factors affecting inflation. There are some interesting factors here, and technology is a very big one of them. So do you think we could look at that a bit because inflation isn't just a straight line up, right? I mean, as you pointed out, there's of course there's this huge basket changes, but make things even more complicated. There's some factors at play that just change baskets entirely in a better way. I mean, it's not like I'm old now, so I'm not going to order from Swiggy as much. It's actually like, I just don't need to spend on this anymore. Maybe you could talk a bit more about technology and how things evolve.

Deepak Shenoy: Yeah, this is actually quite dramatic, because if you think about where we are and when I was just before I was getting married and my wife and I would talk all the time, my phone bills were 8 to 10 thousand rupees per month.

Shray Chandra: Which year is this?

Deepak Shenoy: This is 2005.

Shray Chandra: That's a very big number.

Deepak Shenoy: Today, I spend 2400 rupees per year and I have 4 SIM cards at home. So if you add up all the 4, that's still less than 10000 rupees, which was my monthly bill. And I have unlimited phone calls, internet access, which is reasonably fast so fast that if my house internet broadband shuts down, I can just switch on any of the, you know, phones and I'd have an internet Wi-Fi connection through that. I've had a dramatically higher experience for a much lower cost. So what has happened really is that it's an evolution of technology. Well, you know, what was the problem earlier that you had to when you made a phone call? There was a licence fee for having that phone call if you called outside of the state. Somebody had to get paid a higher amount. If you call outside the country, you get paid a higher amount. Technology changed all of that, they said well, you know what? It doesn't cost any different if you have an internet connection. So I can use the IP layer to make calls much more efficient and therefore it costs me the same whether I call you and you're in the next room and versus when I call you and you're in like San Francisco. Today, the cost of communication have come down quite dramatically.

Deepak Shenoy: So what used to be a significant percentage of my expense bill at that time is now nearly nothing in comparison with what it was. And like this, you can take a lot of other aspects. Today, I spend 10 rupees per kilometer on a petrol car or a diesel car. At best, it's 1 to 2 rupees per kilometer for an electric car. And this is now when the technology is nascent. I can expect that it will get better and better in the days to come. But let's say cost of energy went up double. I would pay 4 rupees per kilometre, that is still 60 percent savings from the 10 rupees I paid today. So we know the world is going electric. There is absolutely no doubt about it. It's not because of environmental factors. It's because it's 60 percent more efficient per litre, per kilometer travelled to use it. This means that come 10 years from now if everything is electric, I'm spending 60 percent less than I'm spending today. And perhaps that is deflation and that's deflation that is staring me right in the face. So if today my transportation costs is maybe 10 percent of income, it is going to be 4 percent of income for the same amount driven. Chances, I'll drive a little more. But OK, how much more will you drive? I mean.

Shray Chandra: Well, might be less, actually, for all you know.

Deepak Shenoy: Yeah, for all you know. And then you add a layer and then say, well, you know what? Having your own car is X, but if you didn't have your own car, there would be a metro. And in the metro and we'll come to that later point. But the metro will reduce costs a little more. You don't have to pay

Shray Chandra: I think more than a little more, right?

Deepak Shenoy: Yes. So for instance, if I just said, you know, coming to the Capitalmind office is 6 kilometers. I spent 60 rupees a day coming and 60 rupees a day going. That's 120 rupees a day just coming in and going. In an electric car, it falls to maybe 60 percent of that. So instead of 120 rupees a day I am spending 50 rupees a day. There's a metro that turns up that takes me to the Capitalmind office straight. And suddenly, I'm spending 10 rupees a day or 15 rupees a day or 20 rupees a day. So now your expenditure is largely dependent on how the world evolves around you, and you can expect that it'll evolve in a positive way simply because there are cost savings to these and cost benefits to making these changes. Whether it's a metro, whether it's better roads, whether it's electric cars, that is going to happen. Take the other expense, food. Food has global warming coming. We know there's warming, the world is warming. Either way, as we know let us say that there is a one-degree warming coming up in the next 50 years. No matter how you look at it, there is a very significant body of research that says yields on farms will only increase [00:20:00] as the CO2 levels in the atmosphere rise. By nature, there is actually more concentration of carbon dioxide and a more concentration of temperature.

Deepak Shenoy: The temperature is higher in a greenhouse and yields are higher. Plants grow faster, plants can grow at night. And so there is a significant body of research that tells us that there is more yield. It may not be in comparison saying so for every 1 degree will the yield double. But you know, it's going to go up. If the yield goes up, that means per hectare of farmland, a farmer will be able to produce more and if there is more supply and the world grows because typically the world is growing about 1 to maybe roughly by 1 percent a year in terms of births and point eight percent per year in terms of deaths. So there isn't so much of an increase in population that is net happening in the world today. If that continues, that means there's going to be more yield increases, which is going to be 2 to 5 percent a year versus just a 1 percent or half a percent a year in terms of actual people in place, which means that the supply of food will increase, this demand for food will not increase quite as much. Prices of food items the core food items, is likely to come down and this is across the board. So if you see whether it's onions, onions used to be 10 rupees a KG in 2007 at the lowest point of the year, and today also they are 10 rupees a KG at the lowest point of the year. It's the difference now is that you can get the same onion for 30 rupees a KG if you buy it on site A, a 40 rupees a KG

Deepak Shenoy: If you buy it in an upscale supermarket and maybe 10 or 11 rupees if you go to a wholesale bazaar. These avenues are always available to you in different ways. But that's like saying coffee costs 300 rupees at Starbucks and 10 rupees at my local Darshini. So you know what is the price of coffee? We think the farmers, we have to get richer, but they're not. It's not because we're selling food cheap, it's because they get a very small percentage of the price we pay for onion that sells at 10 rupees. They might probably get 1 rupee of that KG. It's because of bad practices of harvesting, which damages the goods bad practices of transportation, which ruins the goods, bad practices of storage that increases spoilage. All of these items at a cost, and because of that, you can pay only for the farmer only 1 rupee. If you fix these items, you get better harvesting techniques, get better storage techniques, get better transportation, cold storage and so on. You can actually reduce the spoil. And what will, who will do this? It's only technology that'll do this because you'll get, you know, you can use electric technology to cool things with energy availability increasing, you can actually reduce this so the farmers can get the 2 rupees instead of 1 rupee.

Deepak Shenoy: Now remember, they're making more kilograms because they have global warming and increased yields, so they're making more kilograms output. They're getting more per kilogram because of the efficiencies in the system and we, because of the same efficiencies we'll pay 8 rupees per KG instead of 10. So we get a 20 percent saving. They get a 100 percent increase and the middle man still makes a bulk, which is 6 rupees versus the 9 rupees that he is currently making. But the 6 rupees will be earned by somebody else. Now, who that somebody else is? We don't know, but somebody else, somebody in the chain who is not the current middleman is likely to make the maximum out of this whole game. What this means is food costs will come down. Now there's another thing, for instance, if you like to order food, if core food is coming down, that's one of the biggest costs of the restaurant. What's the other biggest cost? It's probably rent because your location, location, location, etc. Rent has changed because Swiggy or Zomato, which has come in which has used tech to do certain things, they've introduced one phenomenon that said, listen, you can cook from anywhere and I'll get it delivered to the person.

Deepak Shenoy: So you make your dishes look attractive on a little phone and I can get food delivered to that person and, you know, market your whole thing for a cost. This allows people to say, I'll reduce my rental costs. A restaurant's costs can come down by just changing the place it is, and run entirely out of cloud kitchens. You might think this is new, but this is not if you think about the Bombay's those dabbawalas, they were the oldest Swiggies. They are a efficient way of taking food from a person's home to a person's office. It may not even be his home. He can order it from somebody else's home and that person can cook for a lot of people. There's a cloud kitchen, right there, and they can make an extra amount of income beyond what they are. And now you commercialise it and call it a kitchen, and therefore it's a restaurant that actually does the same thing. So what's changed because of this? Packaging. Earlier, they would just throw stuff into whatever package. Now you have little bowls and, you know, nice little things and all that stuff. Delivery, they fix the point of and said today if you hire a delivery person and you tell them, listen, you've got to go from place A to place B, he'll say, well, fine, yeah just tell me how much you're going to pay me and I'm ready.

Deepak Shenoy: That's also because of technology because he knows looking [00:25:00] at point A and Point B exactly how many kilometers it's going to take, how much time it's going to take because now you have the traffic mapped in there and that allows him to determine his cost a lot better and any layer of efficiency there, whether it's a better traffic route that he can take to get to your place whether he'll use an electric vehicle to get to your place, or whether he can take multiple orders that fall along the same route. It reduces his cost and therefore reduces the overall cost. So eventually, while the pricing currently may not appear like it's, this whole concept, will create a model that just reduces the cost of the food that you make. So 10 years later, we may still be paying the 200 rupees a dish that we were paying, we are paying now on any given restaurant in Swiggy or Zomato, but we may not be using Swiggy or Zomato. We may be using a different paradigm, an app to do this. This actually means that if you were able to quantify and predict the time and the cost of a delivery that you could deliver food from place A to place B, they've already started to take this one level higher and say, why is it only food? Why can't I do a five-star bar at one place, that's 10-minute delivery? Because they've gotten into. I mean, it's insane.

Deepak Shenoy: I understand. But I like the concept because what they're doing is saying, listen, we can quantify and predict it. If they can quantify and predict it and get it to scale, they can build it in a way that reduces the cost to you dramatically. It is crazy. Day before yesterday I wanted some Diet Coke. I ordered 4 Diet Cokes in 10 minutes it was there and I was like, you know I have a vending machine in our building. I don't know if it has Diet Coke because you have to check an app to see it. In the time it would have taken me to open the app and gone downstairs and done this, somebody delivered it to me for free. Of course, for free I have to thank the VCs for. But assuming that there is some layer of profit in all of this and some kind of a profit pool in all of this that they can share. I think this is ridiculously efficient. Well, think of all of these as removing the middleman. Every layer of efficiency that you're adding in is actually reducing inflation, not by directly influencing it, but by making more paradigms available. Internet was designed for military, and now everybody uses it for, you know, everything else in the world. I don't think people thought it would be used for

Shray Chandra: Well, ordering 4 Diet Cokes, as you just said.

Deepak Shenoy: It's come to a point where I think that technological improvement in our lives is dramatic. So there is actually a lot of effort right now going on to change consumer behavior in order for them to say, listen, let's just sit back and do this rather than the original thing, which was to step over to a shop. It turns out now that the original paradigm may have actually gone to a point where those original players also have realized layers of efficiency. To give you an example, it used to be that Amazon and Flipkart were the cheapest places to buy things, certain things. It's turning out increasingly that they're not. And one of the reasons they're not is because the shops themselves have started to get better and better at their own delivery and processes. There was this big, you know, fight. Local shops in Maharashtra were starting to order. Now a shop is a shop. So you go to the shop to order, so you would have thought the disruption would be that people in their houses would use an app to order the same thing. People don't have the patience for apps. They always want to go to the shop and buy their quick thing in 5 minutes and come back. They're not like me who have the patience to order on an app for, even 4 diet cokes. So the shopkeeper, where does he get his stuff from? Typically, the idea was they would get their stuff from these wholesalers who would send their people over. Now, if the people were inefficient, they would say, yaar aaj nahi aa raha hoon kal aa raha hoon, I'm coming tomorrow, I'm coming day after tomorrow. Because you know what? Not enough on your route and you're saying, Listen, I need some shampoo.

Deepak Shenoy: Why don't you just come? And he's not coming. So what Reliance did, in this case, was to say, listen, why are you ordering from your wholesaler? I'll give you an app. You order from me. I'll have the same stuff delivered to you cheaper because I'm the super-wholesaler. Yeah, it's the shop. So now the shop whose idea of getting it cheap was that you order from the wholesaler and beg him to deliver or go to a DMART and get it at a 2 percent discount, now gets a 5 percent discount, plus credit from Reliance. So the wholesaler is saying, listen, I'm screwed because you're, you know, so you're coming to this point where I think a lot of this efficiency in the middleman is actually translating, not just to the layer of apps and the end-users, but also to the intermediate supply chains going around. I think the more we allow technology to reduce the middlemen, the more we must make efforts to encourage competition to sustain. So, for instance, you should never have a situation where Amazon looks at you and says, if you list on Flipkart, I'm going to charge you 10 percent more or Reliance looks and says, well, [00:30:00] if you order even 5 percent from your wholesaler, I will charge you more. You should not allow them to do that. This is anti-competitive. PVR has already been dinged to a certain extent about this. You've got monopolies in semi-monopolies in areas. Now, this is a natural nature, so Intel was a monopoly in the chip space until today.

Shray Chandra: Well, everything else happened.

Deepak Shenoy: Yes. So there was a point at which they could have abused their monopoly. But the U.S. laws are very, very strong. They don't allow you to abuse these monopolies in any meaningful way, and they break up companies when they become super monopolies in certain areas and

Shray Chandra: Or they prevent M&A

Deepak Shenoy: They prevent M&A stuff. So there's a lot. So India also has that. For instance, PVR, when it bought a certain movie chain, they said, you are going to be a monopoly in this area. So you can't do certain things. Now but in India, those laws are relatively lax. So for instance, even now, if you go to a PVR, all of them are kind of said, listen, if you come into our theaters, you can't bring your own food and I will overcharge you for popcorn and food. Now, this should be at some point handled by having competitive movie chains who say you can bring your own food.

Shray Chandra: Or our food is cheaper.

Deepak Shenoy: Our food is cheaper. But it's not happening because of their monopoly and it's not, then you think this is a bad thing because this is inflation, right? Because this is stuff that cost me 50 rupees a ticket earlier now cost me 300 rupees a ticket, plus 300 rupees of popcorn, plus so on and so on. But I have the added experience of it being a PVR, so I'm getting more value than I was from my earlier

Shray Chandra: Not so great movies earlier.

Speaker3: So now, of course, there is a value differential, but I think the price differential is substantially higher. So I do have inflation. What disrupted PVR was not another movie exhibitor.

Shray Chandra: Not INOX per say.

Deepak Shenoy: Not INOX. It was Netflix and Amazon Prime and Hotstar and all of these guys who said, why do you even want someone to force only popcorn and crappy coffee with you, on you when you're watching a movie? Instead, watch it at home and we'll stream it over. It's super fast because Reliance Jio has now disrupted internet and so has Airtel and so on. So now you have superfast internet at your house, you can watch it, you can cook your own food and you know what? If you don't want to cook your own food, order from your Swiggies and Zomatoes or whatever or Domino's pizza or whatever it is, and you have the moviegoing experience at home and you might say, well, it's a small TV now, no but now you've got sixty-five inch TVs for a ridiculously low cost. You get sound systems that make your hall into a movie theater. You have equipment that makes it feel exactly the same. And if you wanted and you know what? You can watch this any time. You can watch this at 11:00 in the night, which is when you get free from all the work and all the kids and all that stuff, which no theater will have a show after. But you have one, you can have it at your own house. So the PVRs are getting disrupted, but not by the fact that they were a monopoly an exhibition, but they were not a monopoly in people consuming movies to a certain extent

Deepak Shenoy: You know, inflation has gone up in certain cases, like if you look at the pure cost of going to a movie, it has gone up. But for me to consume a movie today is actually down because I can say, listen, I know what I consume 15 movies last month where earlier I would have consumed 2. But I only watch 1 of them in the theater and the 14 of them were watched at home. So my cost per movie is substantially lower or my overall movie bill for the month is 1 external movie and all these 14, you know, local, you know, so my overall cost is actually lower than it was 4 or 5 years ago. This is where it's interesting because the same basket is now cheaper. Yeah. So the same food is cheaper. You're just getting it from a different source. The same transportation cost is cheaper because of using electric. And there's a little more of a boring element to all of this, which is the monetary inflation. We keep thinking RBI is going to print like crazy. The Fed has printed. All this is going to result in inflation. RBI's printing money does not create inflation. There is a difference between a system being and something called a deficit and a system being something called a surplus, a hook. You ought to think of the RBI as a big stone building where nobody can enter.

Deepak Shenoy: If the RBI prints money, it sits inside there. That does not cause inflation. The money that is created outside of that building is where money is really created. Now, RBI prints money, it expands its balance sheet so it can print money and buy stuff. Who does it buy it from? It largely buys it from banks, so when it buys something from the banks, the banks also have an account inside of that stone building. They get the money in their account inside that stone building. That doesn't reflect on the outside at all because they just have money inside of RBI. Now how do they have money outside? My vision is this you don't need the RBI at all for inflation to go up when you have 100 rupees chasing 100 goods, price per good is 1 rupee. If you print 100 rupees more outside, so you know that [00:35:00] the people in the country have 100 rupees more, each could cost now 2 rupees. That means you have double inflation on price. This is the same if you think of software engineers in Bangalore or in India.

Shray Chandra: More money with the same level of talent...

Deepak Shenoy: More money that's coming in. It's not like this, the engineers are more productive, it's just that more money is chasing them, so you kind of give more salaries, perfectly fine. There's nothing wrong with this. It's just demand and supply. But it's not the same with let's say your household help, your maids or your drivers.

Shray Chandra: Well, you can't see the same level of price factor.

Deepak Shenoy: So, yes, supply is up 10 percent. Demand is up 10 percent. So it's not like demand is up. You know, the money chasing people who do gardening is not 2x of what it was. And even if it was, there are probably 2X of gardeners who would come into the system at that point. So keeping the prices stable. So to that extent, supply and demand is largely

Shray Chandra: In balance for now.

Deepak Shenoy: In balance for now. It's quite interesting to see where that U.S. inflation came from. It was not because the Fed printed. The Fed could have printed to Kingdom come. The difference is that the government borrowed more and more money and gave everybody this 1000, 2000

Shray Chandra: There was some payout. Yeah.

Deepak Shenoy: 600 dollars per week. They paid them for about 8 or 10 months, and that is real money. That's money outside of the Fed and the RBI that has actually come into people's pockets and that's what's caused inflation. India doesn't have the same inflation simply because India, the government did not print that kind of money to spend. In fact, the government spending has been relatively lower. In fact, going forward, it's very interesting to the government spending on these, you know, giving free money thing is actually even lower. The farm subsidies are lower than in the budget than the year before. Spend that they're doing on NREGA is substantially lower as a percentage increase compared to last year. So given this, I believe that the useless expenditure which is just giving people free money is going away.

Deepak Shenoy: They're spending more on capex and capex actually has a resultant increase in productivity. So if I build a road, I may spend some money building the road, but then more people are able to travel and so on. This productivity benefit that happens, this will change inflation going forward. So the way the government spends money will also change itself going forward. The banks in general create money. Now banks create monetary inflation because what they do is, for instance, if a bank gives Shray 1 lakh rupees as a loan, it adds 1 lakh rupees to Shray's bank account, so Shray owes them 1 lakh rupees. But they also say, listen, we have 1 lakh rupees of Shray's money in a bank account in Shray's name. So effectively they have created an asset, which is a loan that Shray has to repay of 1 lakh rupees, and a liability, which is that

Shray Chandra: They put that much money.

Deepak Shenoy: Shray has 1 lakh rupee. So a bank has expanded its own balance sheet by giving a loan. Now Shray could say, Shray pays Deepak 1 lakh rupees. Now Deepak has 1 lakh rupees in his bank account. Shray owes his bank. Deepak is owed by his bank effectively, it's a liability. So the liabilities and the assets of the whole banking system go up. According to the amount of lending.

Deepak Shenoy: This amount of lending has nothing to do with the amount of money that the Fed or the RBI has printed. Whether RBI could keep on printing and people, the banks can say I am not willing to lend Shray 1 lakh rupees because I don't think he's a good friend, so the banks lend because they're afraid they won't get their money back in their own capital is fixed. What the RBI does by printing is to say that, listen, if you guys need money there is money here. And why do you need money? So if the bank lends Shray 1 lakh rupees, it has to place 4000 rupees with the RBI as something called a CRR. This is something that in a time when the world is, Indian system was in a deficit. The banks would struggle and say, listen, I don't have this 4000 rupees, I need to borrow it from somewhere. They would go to the RBI and say, give me 4000 rupees at a repo rate, and they would take this 4000 rupees and keep it for their, as their required CRR. System was in a deficit. Today the system is in a surplus because banks have way too much money inside the brick wall of the RBI. So they're like, listen, no matter how much I lend, there's enough money sitting as CRR, so I have excess money. So instead of having 4 percent of what I've lent, I actually have 10 percent of what I've lent sitting in that Stonewall building of the RBI, so I could continue to lend more.

Deepak Shenoy: But I, you know what, I don't have enough credit. So my credit growth in India is only 8 percent. So to give you an example of where money comes into the system, it comes in from RBI, which prints currency notes. That's about 4 lakh crores, let's say, 4 lakh crore in a system that currently has 200 lakh crores of money. If you had all the money in the system, it's about 200 lakh crores. This 200 lakh crores, they print another 4 lakh crore. That's just 2 percent more. Then you know, the whole banks and the system as a whole has lent the government about 100 lakh crore. And, you know, to people like you and me and corporates and all that, another hundred lakh crores, that's the whole system that sits out there. The government has increased its borrowing by [00:40:00] about 10 lakh crores. Perhaps we all have increased our borrowing by about 8 lakh crores. This is the total new money that has gotten into the system. The government has borrowed more and has spent the money. We have borrowed more and we have spent our money and the RBI has printed currency. In all of this, the amount of money that's in circulation is probably about maybe 18 to 20 lakh crores out of 200 lakh crores.

Deepak Shenoy: That's about 10 percent more, right? Now they're saying, ok, 10 percent, that's inflation is at 10 percent. But you know what? Our economy has a productivity increase. That means instead of producing 100 widgets yesterday, we're able to produce 106 widgets today. A barber is able to do, the barbers in the country as a whole are doing 200 haircuts versus 180 last year. So there is, this productivity increases what's called the real growth of the economy. The real growth of the economy is about 6 percent let us say. This year is a little bit higher because of corona, but let's say on average it was about 6 percent. 6 percent of 200 lakh crores is about 12 lakh crores. So in reality, the excess that we've printed is in the economy is only 8 lakh crores. The RBI itself may have printed 25 lakh crores. We don't care, because you know what? Only 8 lakh crores excess is adding to inflationary pressure in the economy, which is 4 percent. So inherently, monetary inflation is based on how much credit is created in the economy and how much government spending is there. Not really about how much the Fed or the RBI prints, which is why the Fed increasing interest rates will affect a system only when the system is borrowing so much that increased interest rates will cause it to borrow less.

Deepak Shenoy: Coming to this point of whether interest rates increases will actually result in lower inflation, my answer to this is at this point, it appears that inflation seems to be more supply-led in the near term. But longer-term, if you look at it, the technological impact of larger and larger efficiency increases in the economy means our actual inflation will be substantially lower than we imagine it will be, going forward. Interest rate increases will come primarily because of a reactive measure. The reactive measures are simply, listen, inflation's going up. I have to do something, so I'll increase interest rates. Once inflation starts coming down, they'll be as, you see what happens when you increase interest rates in the U.S. for instance, is there will be reduced mortgage interest and mortgages are a big reason for growth in the U.S. There is a reduced amount of interest in a number of other loans, including car loans, including, and you need this part of the economy to continue. If people are going to move to electric, they're going to have to take more car loans in order to be able to pay for their purchase of an electric car, which will save them money. Otherwise they lose, you know, the same shitty old car, if you may, which will not save their money at some point of growth gets hampered because of inflation.

Deepak Shenoy: They will keep the interest rates low. Your problem in the longer term is to estimate whether these are temporary blips in the overall economy or is there understated inflation increase that should cause your spending to dramatically increase over the long term versus something that's really a short-term exercise? I believe firmly that inflation is a short term problem that's led by supply issues that have come as a result of corona and some temporary geopolitical issues, or more than the longer term, where if I look at a world that consists of more electric cars, more food production, more efficient technology, I think inflation as a expense number will only come down. The U.S. is probably going to be the forefront of this. India is a lot less efficient than the U.S., so our efficiency measures will take time to kind of realize, but I think it will come down eventually. There was a show called "Who Wants to be a Millionaire" in the US? And it still probably useful because a million dollars is a lot of money even today in the US. A million rupees is no longer

Shray Chandra: A meaningful number.

Deepak Shenoy: Meaningful number in comparison to what it was. But I think if today our number is 1 crore, that is meaningful or 5 crores that is meaningful the next 20 years, it will still remain meaningful because inflation is coming down.

Shray Chandra: So this brings me to my finale and the question where things become more actionable given this, how do I think about my investment? So how do I invest more bluntly because I get what you're saying? Inflation could change things, baskets can change things. We had a little intellectual chat about this earlier in the podcast as well. But now on this, tell me how I should actually think about saving my money because I do have to make decisions.

Deepak Shenoy: Since we're not talking of investing for the sake of making money, but for the sake of a purpose. Yes. Then the amount of money I estimate I need may be much higher than I actually need. So if I'm thinking I spend a lakh of rupees today, and therefore in 15 years, I'm going to be spending two, two and a half lakh rupees. It may not be the same basket. It may be the same basket at a lower price. And both [00:45:00] of these are very likely because in the sense, I will have lesser items in my basket. I'll have lesser to plan for kids, rent, to plan for at that time. I will also have a lower expense bill on the same items that I'm spending. I may be spending a little more on a few other things. But by and large, it means that my expenses won't go from 1 lakh to 2 lakhs. May be going from one lakh to one and a half lakh. If you look at a person and say, well, you know what? Your inflation is actually going to be substantially lower. It's going to be 5 percent or 4 percent a year. And the amount of money you need is only 4 crores at the end of, say, 15 years. It's possible that you say, listen for 4 crores, I roughly have maybe one to one and a half crores already, in a, maybe an EPF or a bunch of other investments that I've already done, and I have more money coming in in the future.

Deepak Shenoy: So, you know, what should I really risk all this money in trying to get the maximum returns I want to get? Versus I could keep it in a GILT fund for 15 years? And you know what, that 1.5 will become 4 by itself. It's less risky than taking on equity kind of risk. Or I could do a simple index fund. Why do I need to find the most fancy stock in the world because my needs can get taken care of by a lot lesser so because otherwise, if I told you, you need 8 crores, you would say, well, you know what? I need to take more risk. Maybe I need to take less risk and that less risk will take me there. What this means is you still have the surplus. Now you can do two things with the surplus, you can spend it and spending is meaningful. Money is meant to be spent and you can do great things with spending and that means travel, it could mean buying new things, it could be whatever it is that makes you happy. Having dinner at a fancy restaurant, not thinking, not worrying about the consequence of it, but you could also do a different thing on the investing front.

Deepak Shenoy: You could say, listen at the longer term, I will have enough skills. I may retire, but I need a corpus at the time I retire to be able to set up a business and that business needs some maybe 1 crore to set up. I could now use my surplus money, which I don't need because I've put most of my money in a GILT fund that's going. I could put that into equity, aggressive equity, it could be a stock, a mutual fund that I purchased that is aggressive. It could be equity investment that I do directly. I could use a PMS. Now this is where we have something to offer. But also you could use IAF's investing in startups, bunch of other things and go down that route to say, well, you know what? This is where my long term extra money that I don't need to survive, but I need for, you know, this great thing that might just about happen. I could get more aggressive with it. I don't have to worry that I can lose money. So it gives you more money that you can lose or that you can spend, which means you can grow it or you can spend it however you want and without that guilt that I'm taking away from that retirement, simply because my estimate of inflation today is way higher than it actually will turn out to be.

Deepak Shenoy: Simply because of these productivity benefits, it opens your mind out to new things. It allows you, at a certain level, a feeling that I don't have to stop working because, you know, just because I have the money doesn't mean I have to stop working, but I can work on stuff that I really want. And most likely that's going to continue to give me an income. And I will tell people in general, it's a great idea to generate a layer of passive income where it involves your passion so you might be passionate about, I don't know, books you might write your own book, you might review books on YouTube and set up a channel that is so popular that it gives you additional income. Or it could build you another layer of something that says, well, you know what, with this layer of passive income, I need even lesser money to, for my corpus to generate during retirement, which gives me more of that money that I can lose that I can spend so I can go, you know, do my YouTube channel and go, then watch Wimbledon in the most expensive seats possible rather than sitting like, you know, 500 meters away and using binoculars to see the

Shray Chandra: you've said enough but wait till technology gives you some AR version at home and you don't need to go. So to just put into buckets, maybe this is slightly interesting take. So it's an asset allocation that might be based on use cases. So your absolute core, I need this much can be in something as boring as GILT funds, maybe add some corporate debt or whatever your maybe the next level of lifestyle, you can just be in index funds. And when it comes to like maybe funding your own business or the Wimbledon seats and so on, that can be through something more exciting. I know that's not how we generally tell people to segment their money that they're saving, but it could be one way of thinking about it. So core stuff on debt. Slightly more interesting stuff in equity and more stuff

Deepak Shenoy: And it really depends on when you started. Some people who started really early in their lives, they've probably generated enough corpus to say, well, you know what? Now we could tell them listen this is the time you move, switch over and start spending your money. You know what we are just getting out of COVID. All of us have been cooped up for years [00:50:00] in our lives. We want to spend our money. But at the same time, we have all these fears of inflation coming, 7.5 percent US 1982 se nahin dekha. All this drama that's happening, I think this is noise. We should actually go back to the drawing table and say things are going to be different going forward. And if we believe in humanity, I mean the fact that wars don't destroy our entire race in this case, it doesn't matter anyway. But assuming that you know, we don't get layers that it completely destroy our life. I think inflation is going to come down and you're right, the buckets that you create, you have to reorganize your life into buckets that are easily achievable with debt, more exciting and therefore more meaningful for you to do, which can give you great things that you might want to do in the future. All investing is either it's spending for the future. And really, I don't think most of the people really want to leave money for their kids, primarily because their kids are going to generate so much money they are not going to want it in the first place. And second, you know, you've generated the money. Spend it. It's I think it's a great pleasure to have. My overall thought process over here is that this helps you, if this helps you think about inflation as it's not as scary as it used to be

Deepak Shenoy: I've always said you gotta plan for your kids to say, go to the U.S. for higher education. The U.S. traditionally, and this is me coming from the 1995-96, is typically $50,000 to $70,000 a year or x y z. Now I'm seeing kids come out of online universities and be short of programs which are more meaningful, more useful for life where there are no equivalent courses. I've just gotten myself an MBA for regulatory reasons. But I think people with no degrees are far better than me in terms of a lot of the financial things. If this changes, what do I do with the $50,000 I've saved, and because you know, my kids come to me and say, You know what, I don't need $50,000. I've done these ABC courses and you know what? I've got the exact job or start-up that I want to work with. And I'm like, wait a second, what have I done with all this? I struggled all my life to save you this money, and now you tell me you don't need it. This will happen at some point in our lives. We will save for stuff that we realize we don't need the same amount of money for. And I think. As much as I hate to say this, as a person whose job is to, you know, help people manage money is that I think I should warn. I mean, we should warn everybody, really, that maybe you're doing too much as well, and maybe it's not as bad as you think it is.

Shray Chandra: That's a lovely note to end on. You don't necessarily need the ridiculous number of 30-20 crores to retire. So with that, Deepak, thank you so much. And to our listeners, thank you so much for listening. If you've made it this far, please take note of our Discount Code CMPODCAST for a discount on Capitalmind premium membership. You can see more of our episodes at capitalmind.in/podcast, and while you're on our site, you can learn more about our do-it-yourself and fully managed portfolio managed service at Capitalmind.in Deepak has a book out. It's called Money Wise. It's available on Amazon and Flipkart or at shop.capitalmind.in if you want a signed copy and if you have any feedback, suggestions, or topics for our next episode like this one we just recorded, please send over an email to podcast@capitalmind.in. Well, thank you so much, and thanks for listening.