Good Money Habits

What do you answer when someone asks you about your well-being? We generally say we are fine or we are doing okay or not so good, if we have any problems, right? Similarly, being financially well is equally important and one should not hide or shy away from seeking help. The foundation for being financially well comes with habits. A habit is something that makes or breaks your future. So when it comes to financial matters everything boils down to what you want out of life and what are the milestones you want to achieve.

Elaborating the concept of having good financial habits, Ms. Jain further mentioned in the session about the meaning of being financially independent, how insurance can be a gateway to a safer life, clarity regarding the savings and investments and the basic good habits that one should follow. Talking about financial independence, Ms. Jain gave few examples about what financial freedom meant to different people. It was surprising to know that everybody might have invested in the same stock but what they want out of those investments is different. This is because when we assign meanings to all these investments, the time frame is clear and one can map out their journey correctly. Once you know what financial independence means to you, you will automatically come to know what to do with your money.

Coming to the topic of insurance, it is divided into three categories: Life insurance, Health insurance, and Critical insurance. Ms. Jain claimed that insurance is her top most priority as it protects not only the individual but also their loved ones. The risks here are totally different from the risks in equity. Life insurance gives you the promise of protecting your family when you are not around anymore. Basically, if you have a sum of money today, your life or your family’s future is protected. If you are hospitalised you get health insurance and if you are recovering from a life threatening illness, a critical illness policy will help you sail through that time.

What does CPI reflect?

CPI is a vital economic tool; it highlights several key parameters which are useful for the government to draft policies and take measures accordingly.

The cost of living

CPI measures the change in the prices of consumer goods. As the price of consumer goods and services change, the cost of living would change too. Say if the prices of groceries and everyday essentials has increased, the cost of living has increased too. It reflects the cost of living of consumers in society.

The increased prices of goods and services

CPI helps the government to understand which goods and services have increased their prices, the percentage of rising in prices and the overall pricing graph of the product/service. While higher prices over the years are no surprise for the government, an astonishing steep rise in any product/service is concerning.

Indian rupee’s worth

With CPI, the inflation rate can be calculated and so can the money’s worth be. The government will be able to access the value of the Indian rupee. If the value is declining over time, required measures can be taken.

The purchasing power of consumers

The cost of living and the purchasing power of the consumers can be calculated using CPI. As the cost-of-living increases, the purchasing power is bound to change across various strata of society.

How is CPI calculated in India?

Measuring the price of baskets of goods and services consumed by an average Indian is a strenuous task. As the baskets of goods and services include food, clothing, electricity, transportation, education, medical care and many more. It almost includes anything and everything that requires money.

CPI is calculated by comparing the current price levels in the market to the price levels of a market in the past. The price levels of the previous year are referred to as the base year. The base year here acts as a benchmark for comparing with the current prices. Currently, the base year is considered as 2016. The base year is monitored by the Central Statistics Office (CSO), Programme Implementation (Mospi) and Ministry of Statistics. Changes are made from time to time by these committees.=

What Does a Trade Deficit Signify? 

Usually, economists subtract debit items (imports, foreign aid, domestic spending and investments abroad) from credit items (export, foreign spending and investments in the domestic country) to calculate trade deficit or surplus for a given period. According to the Reserve Bank of India, Indian Trade Balance recorded a deficit of 15.4 USD bn in Dec 2020 and a deficit of 9.9 USD bn in Nov 2020. The average deficit value is – 377.7 USD mn for India with an all-time high of 652.0 USD mn in Jun 2020 and an all-time low of – 20.2 USD bn in Oct 2012. 

Around the world, the scenario is different for different countries. For instance, the United States has had a persistent trade deficit since the 1970s. While China’s trade surplus has spiked despite the pandemic reducing global trade. In 2019, Germany had the largest trade surplus followed by Japan and China. The United States had the largest trade deficit with the United Kingdom and Brazil right behind. 

Trade Deficit and Economic Stability 

A trade deficit is not necessarily a practical indicator of any economy’s stability. It should be observed relative to the business cycle and other indicators. During recessions, countries try to increase exports to induce jobs and demand while during booms, they import more to encourage price competition to control inflation. 

Deficits can initially raise an economy’s standard of living as residents have access to a larger range of goods and services at more competitive prices. With lower prices, it keeps inflation in control. However, at later stages, it can lead to the outsourcing of jobs to foreign countries creating fewer jobs at home due to an increase in imports. At the same time, foreign companies increase hires to keep up with increased export demand. A trade deficit often makes domestic currency cheaper in a floating exchange rate system. This makes imports more expensive, pushing consumers to reduce consumption of imports while shifting to less expensive domestic goods. This increases the competition of exports in global markets and reduces the deficit by itself. However, deficits are also problematic in the long run. If a country persistently runs deficits, citizens of other countries acquire funds to buy capital in that nation. 

Trade Deficit and Inflation 

International trade is measured in U.S. dollars (United States of America). When a country runs a deficit, the demand for dollars to pay for imports is more than the supply of dollars for exports. This leads to a rise in the value of the dollar against domestic currency. This reduction in value pushes importers to increase the market price of products they produce as the cost of imported material increases. Due to the increase in the price of goods, workers demand an increase in wages and so on. The domino effect creates cascading triggers in all markets which leads to inflation in the economy.

Clearing a Trade Deficit 

As we have already seen the disadvantages of a deficit, countries always try to reduce the deficit. One way to do so is by using deflationary policies like raising direct taxes or increasing monetary policy interest rates. Deflationary policies via a rise in taxes slow down consumption growth by reducing disposable income. This reduces demand for imports and also helps to lower inflation which then improves the price competitiveness of export industries. However, such policies contract planned capital investment which damages productivity and has the potential to worsen the trade deficit.  

Another way to go about it is for the central bank to change monetary policy. It can also intervene in the currency markets to depreciate the exchange rate against major trade partners to make exports more competitive in foreign currencies. 

A country can also use supply-side policies to increase productivity and make exports more competitive at the same time reducing dependency on imports. Supply-side policies theoretically have the best prospect of achieving a sustainable reduction of the deficit.