Why I cannot save the same money I used to before?

I am sure there are answers in your mind already. Cost of every thing from salt to flights have gone up. Err, salt still costs same for now, but you get my point. Middle class people are those who have the  ability not to stay poor. And then you have lower middle class and upper middle class. But why there is no middle middle class? We can let our eminent economists to figure that out.

There are two answers to the above question, really. One is, of course the hike in all prices and the second one is change of lifestyle.

Let’s dig in the first and understand why you are paying more than what you used to.

1. Greed

Oh yes, you are right. No one in his sane mind would put this point first. But life is driving me and many others insane, so why not?

So there is a greed issue here. It is a direct outcome of difference between demand and supply. More the demand and less supply will push the prices up. I don’t think there is any economic theory that exists on how much the price would be pushed up. Although you can draw your own conclusion, it is uncontrollable. The middle men in trade see this as a fantastic opportunity to cash in money. They would pump up the cost bit by bit on wholesale prices. They are the biggest beneficiaries of this unwanted rise.

In all cases, the farmers should stand to win instead of these middle men. One reason why there are hardly new farming communities is because they do not get the price deserved. Irregularities (corruption) in irrigation projects add another blow. If farmers do not make money, why will they farm? This causes lower production and higher costs in importing food, directly pushing the costs per kilogram.

Another way to push the prices up artificially is by stocking the food grains. This way, they artificially induce that there is a lack of availability and push the prices up for personal gains.

2. Floods / Drought

The recent flash floods in Uttrakhand are testimony of what nature’s fury could do. India has seen many such floods, causing huge damage to farms and livestock. This shoots prices up since availability of crops and vegetables become scare in the region, and have to be brought in from far places, adding the travelling cost. However, this also causes the same demand/supply gap I wrote in the earlier section, since each region has its own limited production levels.

Another issue has been the drought, which means less to no water for agriculture. Here again, the effect of consistent and high demand v/s lower supplies cause much of price hike issue.

3. Government Ration & Food Corporation of India

All of us in India have ration cards. Till some time ago, it was a very important instrument to prove your identity. Government own Food Corporation of India (FCI) procures food grains from farmers for distribution. On the basis of ration cards, we all had a quota of rice, kerosene, wheat and some other pulses. All of them are stored in warehouses or godown owned by Food Corporation of India and subsequently distributed to people via government appointed Ration shops.

However, these ration shop franchisees or agents would double time the fellow citizens by selling the good quality produce to other “middle men” and local stores at profit, and they subsequently sell it on their stores at even higher prices.

When the common man is told of non-availability of ration or poor quality of grains due to some fictional problem, he is forced to buy the very same food grains from these middle men and local stores at higher cost. Something he/she was entitled to get at much lower price. At least where I live, we have adapted a mentality that if you want good quality, there is no point going to the ration shops. You will never get it there. I have not visited a ration shop in last 8 years.

The news channels in India have often showed the way FCI stores these, where the food grains are affected by water leaks and other elements like rats and insects. Every year, tonnes of food grains go waste.

Based on a recent announcement, the Cabinet Committee on Economic Affairs (CCEA) approved a Food Ministry’s proposal to offload 105 lakh tonnes of food grains from Food Corporation of India stocks in the open market to contain retail prices. Wheat will be sold ex-Punjab and Haryana godowns to bulk consumers and traders at Rs. 1,500 per quintal plus freight. And 5,00,000 tonnes of rice will be given to States for retail consumers at Rs. 1875 per quintal plus freight. – The Hindu, June 21, 2013

There you have it, bulk consumers and traders get to buy food grains for INR 1,500 per quintal, however States get it for INR 1,875 per quintal. Why should states pay INR 375 more than traders? States use our ‘tax money’ to buy wheat, and sell it back to us – an indirect double taxing if you will.

4. Fertilizers, insecticide, pesticide and GM crops

Many of the farmers use fertilizers, insecticide, and pesticide to increase produce and protect produce from being affected by insects and pests. Although these are necessary for large scale production, these come with additional cost.

Many of the fertilizers, insecticide, and pesticide are very costly because they have attached royalties that are paid to multinational companies. In spite of taking such measures, some of the crop is lost to these natural elements.

5. Transportation Cost

A direct impact every time government raises oil prices is an increase in prices of almost every thing. The earliest I remember buying petrol at a pump was at the cost of Rs. 19 / liter. But today, the prices have shot up to Rs. 73/liter.

One thing has perplexed me many times is why the prices raise if  only retail petrol rate has been raised? Well, we all know trucks, tractors and generators run on diesel fuel. Essentially, your commodity transportation cost should be affected only when prices of diesel is raised? I believe it is one more chance taken by those in the middle and some retailers to raise prices artificially.

6. Taxes & Corruption

Taxes are always a pain for all of us. But taxes are taken to develop the state, country and provide public welfare. With the amount of corruption we face in our day to day lives, it is almost no-brainier that taxes are not being effectively used for public’s welfare. In Mumbai, for example, there is double taxation that exists in form of Octroi Taxes and VAT or Value Added Taxes.

Once in a conversation with Ben, one of my senior colleagues while working with a Netherlands based bank. Ben and I were talking about the corruption involved in India and I came up with Taxation being a burden. To my amazement, he said he was Happy to pay taxes instead of ruing about it. Obvious to me for that time, it was a shock. Why would someone be happy to pay taxes.

He said a when his government is giving him better lifestyle, good economy, great infrastructure, awesome education and healthy life, why should he mind paying taxes? I could not but just agree with him.

But reality in India is tad different, and we all can swear by the fact that at some point of time, we have been at the receiving end because of the misuse of tax money.

Conclusion

So now you know some of the many reasons why you cannot save more money. Increase in cost has effectively reduced the amount of money you could have potentially saved for your future.

I will be coming with Part 2 of this post, sharing some of the reasons why you cannot save more money because of Lifestyle. By now, you already are guessing about it.