An answer to a question asked by a student:- (Impact of inflation)
Well said! You are right; by saying impact of inflation is not accounted here. I want to add 2 points here (I am not contradicting what you are saying, that’s foundation of financial management. I never can be.):-
1. USA inflation and growth rate is the almost same; Europe / Japan are struggling for the growth. India is the only country where growth rate is double of inflation (7.4 to 4.4)
2. China is enjoying growth rate of 6.8% of their GDP, but their leveraging is near to 225-250% of their GDP. (Near to 100% of GDP is contributed by Government and rest by private sector). Their foreign reserves are also dropped from 4 trillion (year 2014) to 3 trillion today. Currency is also struggling near 6.8 against USD.
3. Back to Indian economy, Point no.1 : we are the only nation which is enjoying higher growth rate and lower inflation. Point # 2: You will agree that scope of infrastructure in India is boundless (linking rivers, sea transport, bridges, mono-rail, bullet trains, new railway tracks, highways for trucks, rural development, 200 smart cities, make in India, reforms and revolution in Agriculture, education sector – all fields, research & development, 32 line highways, etc. I mean to say if we are @ 7.4% in spite of GST implementation, after 2 more years in 2020 onwards we may grow by average 10% plus for next 20 years. Our economy may move from 2.7 trillion USD to 18 trillion (growing @10% CAGR). If inflation can be managed at the same rate, imagine exponential growth. Story of India is yet to unfold.
4. Strongest point: When we are taking compounding growth rate, Base INVESTMENT remains the same (MEANS 100, 116, 134, 156, 181, 210 .....). But that’s not going to be the same in the case of Stock market. Stock dips to 50% also many times, where we will be able to buy double the quantity of shares with same amount. (RUPEE COST Averaging). Rupee cost averaging can beat inflation impact at its own. Say if you buy 1 unit @ 10500 (NIFTY), with same amount of money you will be able to buy 2 units if price drop by 50% to 5250. In long term, you know all bull markets are followed by bear market and all bear markets are followed by bull markets. Compounding system is not going to understand that we will be able to make new purchases at lower rate. I am just taking the case study of Warren Buffett. At the age of 18, He knew that he is going to be rich. When you invest for very long term, your investments go out of gravity system and perform exponentially.
5. I have tried to explain my point of view, by taking many external factors. This all together may trigger new thought process. In last note want to point out, you are that inflation impact must be account forward, but on the same point growth story of India can’t be ignored.
Thanks for raising this question. God bless you. With warm & kind regards