What is Dosanomics? Raghuram Rajan's Dosa Economics explained

Mr. Raghuram Rajan is an Indian Economist and a distinguished Professor at the University of Chicago. Mr. Rajan was the Chief Economist and Director at the IMF between 2003 and 2006, the Chief Economic Advisor of India in 2012 and the Governor of the Reserve Bank of India from 2013 to 2016. During his governorship he worked with a vision to bring down inflation rates, bring out large scale financial inclusion in the Indian masses, promote digitalization in the Indian Banking System and dig out bad loans that lay hidden in the Indian PSBs- a move that has opened the nation’s eyes that all is not well with the Banking system. Unlike many of his predecessors in India and peers around the world he is known for his bold and massively unpopular steps when it came to bringing India’s economy on track.

During one of his public speeches and press meetings he tried to explain his move to bring down inflation. He wanted to convey that a low interest rate with a low inflation rate is much better than a high interest rate with a high inflation rate. During his tenure the inflation rate had been controlled to 5% from 10% and as a result the bank term rates also fell from 10% to 8%. This left the conservative term deposit lovers disgruntled. So, to explain his move and to instill the basics of economics in the minds of the masses he used the simple example of a Masala dosa, thus the term Dosanomics.
Here’s his example:

Scenario 1

High inflation 10%

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The saver knows that he can get more dosas if he just kept his money in a bank’s Term Deposit at 10% p.a. for one year. By the end of 1 year he gets Rs. 10,000 (100,000*10%) plus the original Rs. 100,000. So with Rs. 110,000 he can buy 2200 dosas. But here’s the catch! The economy is experiencing a 10% inflation rate. This means that the cost of a dosa has risen by 10% from Rs. 50 to Rs. 55. So effectively he can buy (Rs. 10,000/55) 182 dosas and not 200 dosas from the interest money at the end of a year.

Scenario 2

Low inflation 5.5%

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If the saver deposited his money for a year @ 8% p.a. he would get Rs. 8000 as interest and he would be able to buy (8000/50) 160 extra dosas. But at the same time the inflation has reduced from 10% to 5.5%. that makes the cost of a masala dosa Rs 52.75. Thus the new number of dosas he can buy is (8000/52.75) 152 dosas.

After having read until now you must be wondering about the effectiveness of the Dosanomics, isn’t it? The calculation is wrong somewhere. So where is the error?

During high inflation one can buy 1818 dosas with Rs. 100,000 at Rs 55 per unit and 1896 dosas during low inflation. So ultimately,
High Inflation; High Interest Rate-- No of dosas: 1818+182=2000 dosas.
Low Inflation; Bit Low Interest Rate-- No. of Dosas: 1896+152=2048 dosas.

By this Dosanomics we now know that the savers are earning (48/2000) 2.5% more dosas at lower inflation levels!

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