Raghuram Rajan, RBI governor, likes dosas. Or, rather, he likes using the popular South Indian pancake to explain economic theories. :)
In a speech in January, the governor of the Reserve Bank of India set out why high inflation is the “silent killer” of growth. With high inflation and high interest rates, one who invests 1,00,000 rupees could buy the same number of dosas with the interest at the end of the year as he could at the start, Mr. Rajan said. But if inflation came down, even with a lower interest rate, the same person could buy more dosas each year with the return on his investment.
Mr. Rajan calls this dosa economics.
“When inflation is 5.5% but the interest rate you are getting is 8%, you are earning a real rate of 2.5%, which means 2.5% more dosas,” he said.
Then, in a question and answer session last month, an engineering student asked Mr. Rajan more about his “Dosanomics.”
“When the inflation rate goes up the dosa price goes up, but when the inflation rates are lower, the dosa prices are not lowered. What is happening to our beloved dosa sir?” the student asked at the forum organised by Federal Bank.
Mr. Rajan smiled as he responded. “You have hit on another issue in economics, which is called the Balassa-Samuelson effect,” the central bank chief explained.
He was referring to a proposal by economists Paul Samuelson and Bela Baslassa that countries with high growth in productivity also have high wage growth.
“The technology for making Dosas hasn’t actually changed,” Mr. Rajan continued.
“There has been no technological improvement there. However the wages of paying that gentleman especially in a high wage state like Kerala are going up all the time because that worker can be used in much more productive areas,” he added.
Factory workers or bank clerks can now serve more people because of technology. The dosa guy can’t.
So what happens is, in an economy which is growing, the prices for the goods manufactured by sectors that aren’t improving their technology will go up faster than in those where production speeds are going up.
“That’s Balassa Samuelson, you are seeing it in the price of Dosa” Mr. Rajan concluded.
