False security

False security

The inflation that makes its way to the headlines of newspapers and political campaigns is the Wholesale Price Index (WPI). But this is not the index that affects you.

It's déjà vu: a year-and-a half ago, we said it here. Now we need to say it again: inflation, touted as being well under control at 0.26%, is too high for comfort. This is because the inflation that makes its way to the headlines of newspapers and political campaigns is the Wholesale Price Index (WPI). But this is not the index that affects you. What impacts the ordinary consumers is the Consumer Price Index for urban, non-manual employees (CPI-UNME). In February 2009, this index was at 9.9%.

If you were lulled into a false sense of comfort, don't be too hard on yourself. Experts have filled reams of print debating whether inflation would touch 0% or head for negative figures. None of it was wrong; only, they weren't talking about the index that impacts your monthly budget. As we had said before (read ‘The Invisible Hole' on, the CPI-UNME is more relevant to urban Indians because it tracks their consumption baskets more closely and reflects retail prices.

The point is, if the weightages in the two indices are so different, why isn't an almost 10-point gap between the WPI and CPI seen more often? Is there anything special this time? "The culprit is the price rise in food, which is given a much lower weightage in the WPI than in the CPI," says D.K. Joshi, principal economist, Crisil. Inconsistent with other items on the list, inflation in food prices is raging at about 11%. Its weightage in the WPI is only 15.4%; in the CPI, it accounts for almost half the index: 47.13% (including tobacco and beverages). The effect of soaring prices in food is reflected far less in the WPI than in the CPI. This has single-handedly widened the gap between the two indices.

Cereal Killers

Retail food prices in India have been rising despite a global downward trend. Joshi says that the main cause is the steady and high jump in minimum support price (MSP). In 2008-9, the government increased the MSP of paddy (the common variety) by 31.8% and that of lentils like urad and moong by 48.2%. This year, the MSP of rabi crops such as wheat rose by Rs 80 per quintal and gram by Rs 130 per quintal. The shortfall in production of some crops such as pulses and rice has also contributed to the rise in their prices. Experts predict a bumper crop this year, which should scale down the prices, though Joshi says the effect of a higher MSP will not be completely neutralised.

The good news is that inflation in foodgrains is tapering off. The latest WPI figures reveal that inflation in this segment is about 10%. Joshi predicts that lower food prices should pull the CPI-UNME down to about 4% in the next three to four months, whereas the WPI is likely to enter the negative zone.

What's the effect of these changes on your budget? Not much, because food isn't a very large portion of the urban consumption basket. Still, lower prices should help. Lower inflation rates also mean that softer interest rates are here to stay and inflation-adjusted returns on debt investment could be more reasonable. Watch this space for an analysis of the new CPI Urban index slated for release in May.
- By Kamya Jaiswal

Saving grace

What You Get

Apart from the cuts in the repo and reverse repo rates by RBI in its annual policy (which should further bring down interest rates on home and auto loans), there are other sweeteners for individuals. Starting 1 April 2010, the money in savings accounts will earn more than the 3.5% that the banks currently pay. This is not due to the rate hike, but because RBI will switch to calculating the interest on savings accounts on a daily balance basis. Currently, interest is calculated on the minimum balances held from the 10th of each month to the last day of the month. "In a country where there is no social security and a large number of retired people depend on interest income for livelihood, this will mean extra interest income, that too in a falling interest rate regime," says Roopa Kudva, MD and CEO, Crisil. Reacting to concerns that cuts in key policy rates were not being passed on to borrowers, RBI is also considering ways of making the benchmark prime lending rate more transparent. The deposit rates could fall, giving those who want to invest in such accounts a limited time window.
- By Rakesh Rai

Pay order

Imagine getting a letter from the taxman asking for payments—despite having paid the taxes on time. This happened to some unlucky taxpayers this month. They received letters demanding more tax and, worse, interest on the amount. "This is not the case just with salaried employees, but also with companies, self-employed people and others," says chartered accountant Mehul Sheth, many of whose clients got such letters. The epistles say that if the amount is not paid within 30 days of "service of intimation", the taxpayer will have to shell out a simple interest of 1.5% for each month of default.

This isn't because of a mistake in filing the returns. It's the result of an information mismatch: the department hasn't taken into account the tax deducted at source (TDS). The discrepancy is for the assessment year 2007-8. Accountants and taxpayers will now have to provide a written clarification, with essential income proofs, such as Form 16 and 16 A and TDS certificates. Clearly, as far as the taxman is concerned, even when he's wrong, the taxpayer isn't right.
- By Rakesh Rai

Buy patterns

Behaviour Change

When it comes to spending, uncertainty is the prevailing sentiment in the middle class. This means that though consumers won't stop spending, their priorities will change. Mindscape, Technopak's consumer–based consulting arm, has come up with interesting behavioural trends based on consumer interviews. Their findings: while the middle class has always valued promotional offers, even affluent consumers now scrutinise on-pack information for better value deals. Another discovery is the likely increase in sales of mobile phones, especially base-level models, as families ensure members stay in touch. At a social level, the current climate of fear will adversely impact the age at which youngsters move out of the parental home. Also, while consumers cut down their spends on expensive creams and fashion accessories, they will continue to spend on small items like lipsticks, which are not too costly but offer a feel-good experience. You could call it the Lakme index of consumer satisfaction.
- By Rakesh Rai

Score card

Most people don't think it's a big deal if they miss the odd deadline for paying a phone bill or an insurance premium, but this payment record can affect the level of loans you can get from banks. Four companies— Credit Information Bureau of India Ltd (Cibil), Equifax Credit Information Services, Experian Credit Information Company of India and Highmark Credit Information Services—have received RBI approval to set up credit bureaus. They will have your repayment track records across various products and services. If you pay your bills and EMIs regularly, you could be in a position to leverage this proven record to get loans on better terms (see MT Basics, page 49). This is because Cibil is planning to start offering individuals access to their credit scores. "RBI's approval will enable us to provide services to other industry verticals, such as telecommunications and insurance, and also to consumers in the near future," says Arun Thukral, managing director, Cibil, adding, that it will take six-nine months to have a system in place. At present, only banks and financial institutions have access to information. The credit score of borrowers will be a single number—between 300 and 900— derived from their repayment records.
- By Rakesh Rai

Home guard

The best holiday can turn into a nightmare if you return to find your home burgled. If such a fear bothers you, Spicejet has the solution for you. In collaboration with Tata AIG, the low-cost airline has introduced a home-away insurance that covers the loss due to damage or disappearance of furniture, clothes and electrical equipment worth up to Rs 1 lakh while on a holiday. "Now customers can go on a vacation without any worries as this cover ensures that their household goods are secured while they enjoy with friends and families," says Samyukth Sridharan, chief commercial officer, SpiceJet. The insurance comes free for Spicejet passengers, but the riders state that it mustn't be a business trip, the travel distance should not be less than 80 km, the travel time should be longer than two weeks and the tickets should be booked through the company's Website. Also, it does not cover the loss of things that you carry with you. While Rs 1 lakh hardly covers any valuables, it does mean that some of your furniture and fixtures will be safe.
- By Kamya Jaiswal

Clear norms

Fixed maturity plans (FMP), the tax arbitrage instruments from mutual funds that found favour with retail and corporate customers, have come under the Sebi lens. To make them more transparent, the regulator has asked them to disclose their monthly portfolios on their Websites. Sebi's original rules mandated that funds disclose their full portfolios twice a year, at the end of September and March. This move is part of the regulator's efforts to repair the damages that led to the liquidity crisis in October 2008, on the back of the massive redemption rush in FMPs and liquid funds. Though most funds voluntarily disclose their portfolios every month, in case of FMPs, it has been rather discreet. This move by Sebi will encourage investors to reconsider the FMPs. Logically, it could also lead to the next step, whereby all other fund types are mandatorily required to declare their portfolios on a monthly rather than a half-yearly basis.
- By Narayan Krishnamurthy

Paid stay

What it costs

With public healthcare facilities being stretched to the hilt and private healthcare expenses rising annually, the financial burden of managing one's health needs is huge. According to the NSS 60th Round: Morbidity, Healthcare and Care of the Aged Report in India, the average financial loss per hospitalisation is Rs 8,000. The Tata AIG Life Hospi CashBack policy covers hospitalisation expenses and also refunds all the premiums at the end of the 15-year tenure, even if you have had multiple claims. The policy doesn't offer a cover for your treatment cost, but fixed benefits for expenses arising from hospital charges, care, ambulance and other expenses starting from the first day of hospitalisation.


There are two variants of the plan, Silver and Gold, which offer Rs 500 and Rs 1,000 as a fixed daily allowance for the days that the policyholder has to spend in hospital, apart from the expenses already mentioned. There is also the option to receive a 10% guaranteed addition to the premium paid, on maturity, though the premium is higher and the benefit is for 15 days a year and 30 days a year for the silver and gold packages, respectively. Since this policy does not seek any testing at the time of issuance, it's a good option to consider if you are in your 40s, along with a regular health insurance policy.
- By Narayan Krishnamurthy


Nuggets of Wisdom