The Big Mac Inflation Index

The ever-astute Ravi Matthai, Director of Indian Institute of Management, Ahmedabad in 1971, offered me a basic salary of Rs 1,000 per month on my return from the United States.
I doubt if IIMA could hire a faculty member at Rs 55,000 per month today! points out Dr Shreekant Sambrani.

Inflation is the leading topic on people’s mind, from the suits in pristine snow-bound Davos to sweating toilers in fetid Dharavi.

All sorts of reasons are proffered to explain the cancer affecting our pocketbooks, from the war in Ukraine to broken supply lines in Covid-affected China to the ever-present climate change.

Bilawal Bhutto Zardari, the Pakistani foreign minister, used all these and some more to glibly ‘explain’ why the price of wheat flour in Pakistan is 65 US cents a kg, evading the real culprit, the complete mismanagement of the Pakistani economy by successive governments.

Inflation in India has been a major concern lately, but appears at present to be under control.

Government figures show retail price inflation falling to about 5 per cent.

That seems to be borne out by visits to local markets.

Vegetable prices are now the lowest they have been in a year.

That normally happens every winter, but not in the last two years.

Prices of the grocery staples — grains, sugar, edible oils — are all stable.

That provides relief to the average householder, but worries about rising prices are never too far below the surface in India.

A group of former members of the faculty of Indian Institute of Management, Ahmedabad, to which this writer belongs, recently attempted to answer an interesting question: “What is the worth of Rs 100 fifty years ago in today’s purchasing power?

One attempt was to compare the rupee-dollar parity:

So, Rs 100 in 1972 would be worth Rs 1,025. This is obviously not right.

A popular belief is that the rupee was valued higher than the US dollar in the early years of the twentieth century, some estimates being the rupee fetching $ 13.

This is wrong, but so popular it is that Janamejay Sinha, Chairman, BCG India, even wrote an article based on it.

The fact is that in the colonial days, the rupee was linked only to the pound sterling, and that too, from 1917 onwards as clarified by the Reserve Bank of India.

The exchange rate was fixed at 1 s 6 d to the rupee or approximately Rs 13.33 to the pound, which is where it remained until 1947.

The pound was worth about $4 then, which would make the 1917 exchange rate of about Rs 3.35 to $ 1.

In 1947 it was about Rs 3 and after Breton Woods it became Rs 4.76, where it remained until the devaluation of 1967. It became Rs 7.50 to the dollar then.

The major problem, however, is that comparing nominal values of the two currencies does not actually compare their relative purchasing powers, as is well-known and accepted.

Another attempt was to use official price indices:

On this basis, Rs 100 in 1972-1973 was equivalent to roughly Rs 4,000 in urban areas and Rs 2,850 in rural areas in 2021-2022.

This, too, is not quite correct, although the results of such an exercise should be broadly in a realistic range.

The reason for this is that over this long period, the consumption mix and the weights assigned to the various items would change, some quite drastically.

For example, the weight for white goods, especially electronic items, would be substantially lower in 1973 than what it is today.

Similarly, cars would command a higher weight today as compared to 1973.

In consumables, kerosene would have had a higher weight in 1973, which is today perhaps occupied by LPG.

The quality would also vary. A car in 2023 is vastly different from the Fiats and Ambassadors of 50 years ago.

Therefore, a like-for-like comparison becomes difficult, almost impossible.

What is possible is a comparison between what Rs 100 could buy in 1973 and how much the same package would cost today.

This is the Big Mac index approach made famous by The Economist. I have done this for a few items below.

The figures are from my memory, but I believe they are pretty accurate.

Another relevant comparison would be of transport costs.

The Ahmedabad railway station — the IIMA campus one way auto fare was Rs 6 in 1972. I have no clue as to what it is today.

But the minimum fare was 37 paise then, which is now Rs 20, or about 54 times higher.

A Fiat car would cost Rs 11,000 then, if you could get one at all.

At Rs 550,000 you would easily get an entry level sedan today, which would be far superior to the old crates!

Hence, it appears that Rs 100 in 1973 would be worth Rs 5,000 or thereabouts today. This would be an excellent rule of thumb!

There are, of course, some exceptions. Gold, housing (and rentals), salaries, have all gone up by more than 50 times in this period.

The ever-astute Ravi Matthai, Director of Indian Institute of Management, Ahmedabad in 1971, offered me a basic salary of Rs 1,000 per month on my return from the United States.

It had become Rs 1,100 per month in 1973. I doubt if IIMA could hire a faculty member at Rs 55,000 per month today!

Dr Shreekant Sambrani trained as an engineer at the Indian Institute of Technology- Bombay and Northwestern University, then as an economist at Cornell University.
He served as a Professor at the Indian Institute of Management-Ahmedabad, Chief of the Research Bureau, before becoming the Founder-Director, Institute of Rural Management, Anand.

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