On Friday, Federal Reserve Chair Jerome Powell warned that President Trump’s new tariffs could not only reignite inflation, which is already running close to 2 percent (up from 1.6 percent in February), but, more importantly, could also slow down the economic growth we have been experiencing since mid-2009. His comments were made after we saw immediate trade retaliation from China, which sent the US markets tumbling. And it’s a big deal that the Fed chair is saying this.
Although the Federal Reserve has taken major steps toward getting inflation down from its 2022 peak, Powell had to concede on Wednesday that the march toward the 2 percent target is slowing. The new tariffs, added to supply chain snags, swinging commodity prices, and geopolitical tensions, could make that slow progress even slower. Powell also pushed back against the idea that the Fed is on the verge of cutting interest rates. He said the Federal Open Market Committee will continue to follow a “highly cautious” approach that puts inflation control ahead of providing the economy with any additional stimulus.
Wall Street Expectations Clash with Fed Caution
The message from Powell was clear: monetary policy won’t respond to the market’s latest gyrations. The Fed chair and his lieutenants are in the midst of a strategy of doing not much of anything, but by design, with the hope that they will maintain whatever semblance of stability exists at the moment. Investors seem to think that’s a pretty shaky plan, and they’re betting on a much more stimulative story in the Fed’s future.
The gulf that separates political pressure and monetary policy discipline is broadening. Trump is touting the tariffs as a way to fix trade imbalances, but their economic impact is becoming clear. The S&P 500 lost 6% this week, wiping out $5 trillion in value. Major indices fell across the board, and markets for commodities tanked amid fears of a worldwide recession.
Kathy Bostjancic, the chief economist at Nationwide, observed that the Fed is now balancing a delicate situation, on one side, there’s inflation pushing up the cost of living, and on the other, economic growth that increasingly looks like it’s headed south. We got two employment-related reports in recent days, and they were a study in contrasts. One was solid, showing that job creation continues apace. The other was not so hot, showing that the unemployment rate seems to be edging up. We suspect that both reports are incomplete.
Consumer and Business Confidence Under Pressure
Powell also noted that concern is rising among consumers and businesses, and that sentiment is not as favorable as it was not long ago. There is also a possibility of this affecting investment, hiring, and spending in the next few months.
The Fed’s aim is to avoid a situation where price shocks that are only temporary turn into prolonged inflation. Powell underscored that cautious posture as he spelled out the dangers of escalating global trade tensions. Tariffs affect pricing decisions across industries, and the longer they stay in place, the more pervasive their influence is likely to be.
After 75 years of independence from the British Raj, India has emerged as the fastest-growing and fifth-largest economy in the world. By the year 2020-2021, India’s per capita income has increased to INR 1.28 lakh. By August 2022, the country’s Foreign Exchange Reserves amounted to USD 572.97 billion and its GDP (Gross Domestic Product) rose to USD 3.5 trillion. India aspires to reach a USD 5 trillion economy by the year 2024-2025.
At the end of the 1st millennium BC, India was one of the largest economies around the globe which ended around the beginning of British rule. Under British rule, India experienced decentralization as well as the cessation of various craft industries. This coupled with accelerated economic and population growth in the west led to a steep decline in India’s share and by independence, the country’s GDP had been reduced to a mere 4.2%. India’s global industrial output also reduced from a towering 25% in the 1700s to a mere 2% in just a little over 200 years. The British left India in dire straits, dealing with a collapsing economy, poverty, high inflation, and an utter state of confusion.
Post-independence, India adopted five-year plans concentrating on centralized economic and social growth programs. The first five-year plan focused on agriculture and irrigation and aimed to boost farm output and the second, launched in 1956 advocated rapid industrialization with a focus on heavy industries and capital goods. However, this caused the funds to be taken away from the agricultural sector leading to food shortages and inflation. In the 1960s Indian economy was worsened by the wars with China and Pakistan and the political instability within the country. This led to the devaluation of the Indian Rupee. Then, a little over two decades later came the oil crisis in 1991 resulting in a balance-of-payment crisis for the country. The global economic crisis of 2008 left the Indian economy deeply scathed and the country’s fiscal deficit rose to 6.4% of its GDP in 2009-2010.
However, two economic events that have assured a place in history were the demonetization of 2016 and the implementation of the Goods & Services Tax (GST) in 2017. Demonetization was aimed at flushing out black money and striking out corruption and the introduction of GST introduced a uniform tax rate across all states paving the way for easier compliance.
Current Economic Status
Since the beginning of the 21st century, India’s annual average GDP growth has been around 6% to 7%. Between the years 2013 and 2018, India surpassed China and became the world’s fastest-growing economy. The country is the third largest unicorn base globally, being home to 100 unicorns that are collectively worth USD 335 billion. The country is also the third largest by PPP (Purchasing Power Parity) with an estimated USD 11.75 trillion.
The country currently has strong economic fundamentals and is well on the road to becoming a USD 5 trillion economy. Various factors are working in favor of the country. These factors are –
Diversified Economy
India enjoys strong trade relations with many other countries. Its economy is well-diversified with healthy roots.
New Technology Adoption
In the past few years, India has quickly adopted newer technologies, especially in the manufacturing and financial sectors. This has led to higher quality and reduced production costs driving profitability. It has also led to increased investment in innovation.
India’s Gross Domestic Production
Increasing Off-Shore Opportunities
As devastating as the effects of the covid-19 pandemic were, it has favored India, as the working culture shifted to remote teams. This led to developed nations finding it more cost-effective to work with people living in India.
Young Average Age Population
India’s youth population is the largest globally at approximately 356 million. This represents a high 64% working population that contributes to the country’s growth in GDP and per capita income. It also presents a high consumer base for companies to thrive and grow.
Shift to Renewable Energy
India’s dependency on energy imports has lessened considerably with almost 40% of the country’s installed electricity capacity coming from non-fossil fuel sources. This has reduced operational costs for businesses and individuals.
How India Will Take Over the World Economy In 10 Years
Challenges & Obstacles
India’s fast growth has persisted even in the face of the globally crippling pandemic coronavirus. The country, however, is facing several challenges on the path to becoming a USD 5 trillion economy.
Supply Chain Bottlenecks
Developed economies resorted to distributing cash to households to combat the debilitating effects of the pandemic. The supply-chain bottlenecks resulting from the pandemic have also not eased. These have led to soaring inflation across the world, which is exacerbated by the ongoing Russia-Ukraine war.
Interest Rate Increase by the Federal Reserve
The Federal Reserve has increased the interest rates to combat rising inflation. However, these threaten economic growth and may cause ripple effects within India.
The ongoing war between Russia and Ukraine has led to a severe energy crisis in the European Union. This acts as a growth inhibitor.
China’s Covid Policy
At one time, leading the global economic growth, China has continued to announce restrictions due to its zero-covid policy making international trade difficult.
Conclusion
India’s growth is unprecedented and its march is strong and sure. However, challenges like generating employment, curbing inflation, increasing foreign direct investment into the country, and maintaining macroeconomic stability must be successfully dealt with to make a USD 5 trillion economy a reality.
FAQs
How does the Indian economy compare to other economies in the world?
India is the world’s fifth-largest economy by nominal GDP and the third-largest by PPP(Purchasing Power Parity).
What are the key policies and initiatives taken by the Indian government to boost economic growth?
The Indian government has implemented policies such as Make in India, Atmanirbhar Bharat, Digital India, Start-up India, GST, FDI liberalization, Pradhan Mantri Jan Dhan Yojana, and Swachh Bharat Abhiyan to boost economic growth and development.
What is the role of foreign investment in India’s economic development?
Foreign investment has significantly contributed to India’s economic growth by providing capital and technology, improving productivity, and creating jobs. The Indian government has implemented policies to attract foreign investment, which has increased exports and skills in various sectors.
What are the main sectors driving economic growth in India?
The main sectors driving economic growth in India are services, agriculture, and manufacturing.
Shrinkflation is defined as the practice of reducing the size or quantity of a product while keeping the price of the product constant or increasing it marginally. In some cases, shrinkflation may also refer to lowering the quality of a product while the price remains the same. A phenomenon that is common in the food and beverage industry, this strategy is employed by companies to boost profit margins or, at least, maintain them when input costs are rising. British economist Pippa Malmgren has been credited for inventing this terminology in 2009.
While not illegal, it is a practice that is sneaky. It is not a fraud or a misrepresentation of products as the packaging always indicates the weight, volume, or quantity of the products in the packet. Shrinkflation is actually a hidden form of inflation.
As companies determined that customers would turn to substitute products in the event of another price rise, they resorted to a reduction in the quantity while keeping the price consistent. This is not immediately evident to the consumers as the absolute price remains the same, but the price per unit of weight or volume has increased.
Shrinkflation happens as manufacturers face inflation with ingredients and the supply chain. Some of the most famous companies and brands have adopted shrinkflation with their products to combat the price rise in raw materials.
Example of Shrinkflation
A chocolate bar is reduced from 60 gms to 55 gms with no decrease in its price.
A thousand page notebook is changed to an eight hundred page book while its price remains the same.
The price of a cold drink bottle is unaltered while its size reduces from 800ml to 750ml.
A 2 kg sugar packet is reduced to 1.8 kg keeping its price constant.
Causes of Shrinkflation
What is shrinkflation?
A business works on the bottom line of registering profits. Shrinkflation is a useful tool to boost or maintain profit margins without drawing attention, from the company’s perspective. There are reasons and situations when the shrinkflation practice is executed.
– Increased Manufacturing Costs
A product cost is the sum total of raw materials, labor, power, packing, supply chain, etc., plus a profit margin that constitutes a part of the company’s revenue. When the costs of these essentials rise, it affects the price of the final product. This subsequently weighs on profit margins. Companies have to find ways to recoup these losses. Sometimes, for companies that lack pricing power, reducing the weight, volume, or quantity of products might be the best option to maintain a healthy profit without jeopardizing sales volumes.
– Strong Market Competition
Companies and producers employ the shrinkflation strategy to not only maintain their profit margins but to maintain customer loyalty and attract new customers in the face of stiff market competition.
How Does Shrinkflation Impacting Customer
Companies can increase their product prices only so many times before consumers either cry foul or shift to alternative products. So, while the strategy of shrinkflation might be the best choice, it too has its own advantages and disadvantages in the way it impacts the customers.
The harsh reality of shrinkflation for the customer is that they pay the same price for a lesser volume or quantity. Matt Pavich, Senior Director for Retail Innovations at Revionics – a price optimization software tool for businesses – puts it very succinctly –
“It’s safe to say that as much as consumers don’t like inflation—they are more adverse to shrinkflation. Inflation feels transparent and consumers are used to prices fluctuating due to channel, retailer, promotions, etc. but inherently don’t like it when one package once worked for their recipe and now they need to buy two.”
Conversely, Utpal Dholakia, professor of marketing at Rice University offers an opposing view. He argues that product weight fluctuation is a result of companies conducting market research and adjusting product lines to suit customer sentiment and maximize sales and profitability. He says that just because a product is downsizing and now linked to inflation is not an indication of brands cheating their consumers.
Whatever the reason, shrinkflation remains a sore point for customers who are already stretched due to inflation.
Advantages and Disadvantages of Shrinkflation
Advantages
It helps the producers to cope with stiff market competition and retain their customer base.
Manufacturers can maintain their profit levels in the face of rising manufacturing costs.
Disadvantages
It is an unfair practice that encourages duplicity and is against the general interest of the customers.
The practice is termed hidden inflation and can be dangerous for brands.
The constant application of this strategy can result in the decline of a brand.
Conclusion
As powerful a strategy as shrinkflation is to maintain profitability and customer loyalty, its use remains limited. It is a strategy of the last resort and using it too much can have disastrous effects on the brand and the company.
FAQs
How shrinkflation affects customers?
It negatively affects consumers who are already frustrated by rising costs.
Who invented shrinkflation?
The British economist Pippa Malmgren invented shrinkflation in 2009.
What are the causes of shrinkflation?
Increased manufacturing costs and strong market competition are the two main causes of shrinkflation.
Is shrinkflation an ethical practice?
Shrinkflation is morally wrong because it is a form of deception.
You can hardly predict some cancers before it grabs the whole body to an extreme stage. Basically, hyperinflation is a wolf under the sheepskin. The news, the experts, the cunning industry, and even the government may hide the truth to protect the aftermath. Many companies employ a widespread technique to convince the consumers that costs are stable, even though you’re paying more for less weight with the same packaging. Hyperinflation is a negative catalyst that may act slowly but steadily to summate long-term accelerating inflation. So, we will go through 7 case studies of hyperinflation-affected countries of all stages (growth, maturity, and decline) in the economic graph.
Hyperinflation is a terrible stage of uncontrolled inflation with a sustainable panic of supply shortage despite paying more. A country has to face the problem when it has enormous national debt, declining foreign reserves, and long-term political uncertainty. In external events, such as war, and lack of global confidence in the economy, worldwide pandemics push the problem to a negative slope. A government will fund its reaction to the crisis by taking on debt, but it can’t afford services and releasing additional money in the market to make up the difference. Twitter co-founder Jack Dorsey’s tweet at the end of October 2021 fuelled the panic of hyperinflation across the US amid the tough time of the pandemic.
Global Inflation Rate from 2016 to 2021
Countries that Faced Hyperinflation
Hyperinflation is a dreadful state of condition for any country. The following are some prominent countries that faced hyperinflation and the reasons behind them:
Russia
The world’s second-largest arms and crude oil exporter, Russia is heading towards significant inflation, possibly a burst into hyperinflation. The economic data coming out during the Ukraine invasion is not very healthy. Apart from the war, the Kremlin is fighting with an internal three-point trap triangle of (hyper) inflation-pandemic sanctions. As per reports, the Russian regulatory bank called CBR raised the interest rate by 20% to save the ruble from the western red eye of sanctions. As a result, the ruble tanked at a record low of 25% this March.
Amid fear of losing oil and arms export hegemony, the country faces isolation from the West and the US. Investors are trying to get into a safe escape. Many billionaires shut down their business operations as a protest. The economy is being drained of cash. One month down the line of conflict, Moscow enrolled with 3.5 lakh Ukrainian refugee shelter houses, and inflation zoomed up 15.66% this March-end, expecting a 20% fear of inflation in this financial year as per a central bank survey. SWIFT system and payment card firms are ceasing operation in Russia, which is a significant setback for the country. The CBR is struggling to control capital outflow( movement of an asset out of a nation), escalated by the record-long shut down of the Moscow exchange.
Moscow’s financial advisors have shown public confidence to revive their internal banks with additional reformation. It will take some time to confirm the post-invasion period Russia copes with the odd or cross the red inflation line to join the hyperinflation club. Though, as per experts, it has intense symptoms of hyperinflation.
Russia’s Ukraine Invasion
Iran
In March 2022, the Statistical Centre of Iran (SCI) reported an annual inflation rate of 40.2%. The Islamic Republic owned 10 % of the world’s oil, 15-17% of its gas reserves, and 7% of its minerals. So then, why is Iran also sinking towards hyperinflation? Literally, Iran has everything for cooking except the cook!
Weak diplomacy also pushed EU and US sanctions on energy, tech, financial service, and foreign trade. Iran’s president asked its central bank to stop releasing data as it is higher than the SCI tally. Diplomatic gaps weaken the trade deficit.
The country is suffering from basic needs like water. Protesters rioted in Tehran’s streets, resulting in deaths and arrests. The country is accused of state-sponsored disinformation, a dangerous trend to hide the disease rather than treat it.
A silver lining of hope is raised after the US Congress gets its new president from the democratic party in January 2021. Iran is trying to get the Indian market oil with a rial-rupee deal. The US-Tehran has shown some positive signals of melting down relations with the nuclear deal ahead of the Russia-Ukraine war.
Turkey
Ankara crossed the 50% inflation red line and entered the hyperinflation zone with a 54% index as of March 2022. Despite president Recep Erdogan’s battle with the recession, the Turkish people have not achieved a new normal since 2018. His equation to fight inflation is lowering the interest rate. Unfortunately, his flawed policy slipped the currency lira to a loss in the last year. The uncontrolled depreciation of the lira has created a hugely detrimental impact on the economy. There has been a certain increase in the exports, but the following adverse consequences are more than the actual gain:
The significant drop in purchasing power is the result of devalued currency; the salary class people need to pay more lira for the same or less product. Therefore, the loss of purchasing power is a severe impediment to economic growth.
To minimize the inflation risk, Turkish banks have stopped encouraging lending to ensure less money in the market. It has no option when they are unable to raise interest. In the long run, it has an even worse effect on increasing the country’s brain drain. Foreign currency is taking a break, and investors are rushing out of the country. This leads to job or employment problems at worst.
The civil war inflicted on Lebanon’s lira is losing the battle and ending in triple-digit inflation of 215% in front of the US currency. It is enough to cripple the retail, health, transport, and fuel sector investment. With 78% poverty, the country is trying to get a good deal from the IMF. But the corruption grappled the country at such a deep level that its central bank had to face inquiry and slap from the lawsuit. The United Nations confirmed that the Ponzi scheme was a major red flag behind the economic meltdown. Beirut tried to reshape its economy with tourists to the Gulf help. But in 2011, the neighbouring Syria unrest put the country in financial collapse again. In the meantime, the Hezbollah-Iran tie miffed some major gulf countries.
The fall of money was fuelled by the central bank’s direct financing of the government’s public deficit during the civil war. As a result, money has entirely lost its essential rules and everything that made it a reliable store of value. The Govt, despite a defaulter of foreign debts trying to survive with the help of the World Bank and IMF. Another good news is, recently, the new Lebanese govt got a ‘positive outcome’ certificate from the Saudi kingdom. Hope it will improve their credit pipeline.
Sudan
After a military coup, riot, and political uncertainty, the East African nation is more chaotic; debt-trapped Sudan announced it would float its currency as economic conditions deteriorated. According to United Nations officials, Sudan’s food crisis is expected to drop due to the African country’s economic collapse, displacement, and ruined harvests. After the military took over the US, IMF and World Bank suspended their million-dollar aid and SDR (special drawing rights of IMF). Another setback is that the separate region of South Sudan holds 75-80% of oil production in the Upper Nile state.
Since 2016, the country has faced a lopsided economic downturn, covid and coup pushed it on the verge of catastrophe. With the shrinking GDP of 2020 by 3.6%, the country summed up the cycle and added a 359% inflation rate. World food program data warned that about 5.8 million people suffer food shortages and malnutrition. In the current scenario, the political paralysis of Sudan is a significant issue of hyperinflation and food shortage. Moreover, it blocked the foreign fund in the African nation.
Inflation among countries
Zimbabwe
Are you fed up with hearing about hyperinflation in different countries? Here is Zimbabwe for you with a ray of hope. The government had robust growth of 838% inflation in July 2020, and now, there is a significant drop at 50% in August 2021. During this challenging time of pandemics, war, and sanctions, it is not easy to revive the economy from hyperinflation in such a short period. Chronic symptoms of hyperinflation are coming out like lower growth, hunger, a debt-driven economy, low income, jobless youth, and collapsing health sector. It was not fun when the African bread bucket turned half of the population into a beggar.
It was a tough time for the drug-addicted, debt-ridden country when it was announced as having the highest inflation rate in 2019. With a fast depreciating currency and hyperinflation nearing 800%, most commoners watched their hard-earned money turned into a paper bunch. The country suffered 90% unemployment which coerced University graduates to sell vegetables in the market. The confused Reserve Bank of the country introduced a bond note with a 1:1 value against the dollar, but the market doubt was fainting its importance rapidly. In 2019, the Reserve Bank announced RTGS$ and banned foreign currency in domestic transactions.
Pandemic norms encourage digital payment worldwide, and it was reshaping the economy of Zimbabwe. It pushed the RTGS to POS transactions. EFT(Electronic Funds Transfer)and the Card payment system showed robust growth in 2021. Thus, it saves money printing the ‘need’ of a hyperinflationary economy. The rural part also enjoyed financial inclusion (finance access to the poor class), and the govt can track them with the tax system. The untapped section is directly under the payment system. Online transaction access to the internet among youth generates various business ideas worldwide. Bitcoin and crypto came to the discussion table of policymakers.
Venezuela Inflation Rate as Compared to Previous Year (by Statista)
The South American Country seems to be the king of the hyperinflation kingdom without any competitors nearby. In 2018, it reported 65,374.08% inflation, which means people need to carry money in a car dicky for daily retail shopping. A bunch of cash becomes useless in the economy. In the same year, 48k teachers left the country (remember, they are not sacked) to relocate to neighbour-based countries for livelihood.
There was a mass exodus in the middle of 2018. About 4 lakh people left the country, and it was not for armed conflict but terrible hyperinflation. Among the country’s top human resources, doctors, professors, and IT professionals were fleeing the country, leaving unfilled posts. The country faced mass blackouts, and people used candlelight or cell phones during an emergency. The country dried out of medical supplies and doctors; patients had to wait for half a year for an emergency operation.
Critics blame policies of socialism. Experts accused the country of suffering from printing money and a fiscal deficit. Once known as the giant supplier of crude oil, the comfort of the oil zone hit back Venezuela in 2014 after oil prices fell continuously. Since 2014 the country has shown a significant drop in GDP in negative growth.
There is a thin sign of revival in 2021; Venezuela reported a surge of the foreign reserve by $5.1 billion. The country’s central bank claimed to curb inflation by ‘only’ 686% for the same year, a great short-term relief.
Conclusion
Here we did not consider the crisis-hit Sri Lanka or war-torn Ukraine. Moreover, since August 2021, Afghanistan has been out of the internal statistical audit.
Therefore, there is a high possibility that the hyperinflation club will get new members. On the other hand, controlling hyperinflation is far more difficult due to the enormous political cost of the typical solutions. In reality, one reason that can turn inflation hyperinflationary is the populist administrations, which are being trapped in a situation where they cannot make practical efforts to reduce inflation.
It is better to control it in the inflation stage. So, the policymakers or government need to take some bold and reformative steps to prevent the money flow in the economy. It also needs diplomatic efforts, so that the countries can avoid printing $100 trillion notes like Zimbabwe.
FAQs
What is hyperinflation?
Hyperinflation is extremely high and rapidly increasing inflation. It is said to have occurred in an economy when the prices rise over 50% in one month due to economic disturbances and depression.
What causes hyperinflation?
The main causes of hyperinflation include:
High National Debt
Price control that leads to an increased shortage
Economic output decline
Lack of faith in government
Which countries are facing hyperinflation?
Venezuela
Sudan
Lebanon
Iran
Zimbabwe
What is a healthy inflation rate?
A healthy inflation rate is 2% which is considered good for economic growth as in this situation, people are more likely to make purchases in the present rather than wait when they expect prices to rise.
With the industrialization and absorption of technology, digital currencies are gaining much importance of late. Bitcoin is undoubtedly one of the most popular digital currencies because it was the first-ever cryptocurrency that was discovered in 2009, by the pseudonymous developer Satoshi Nakamoto. Therefore, the people who are aware of cryptocurrencies and their concepts are well-versed with bitcoins at least.
The global cryptocurrency industry was last estimated towards the end of 2021 at $910.3 million and is expected to grow at a CAGR of 11.1% to $1902.5 million in 2028. Though we are still devoid of the exact data, the total cryptocurrency investors in India range between 15-20 million, where the total crypto holdings were estimated at 400 billion rupees ($5.37 billion).
Though the cryptocurrencies or the income drawn by the Indians from the same were not taxed earlier, in a recent move to bring the cryptocurrencies and non-fungible tokens (NFTs) under the tax bracket, the Indian Finance Minister Nirmala Sitharaman announced a 30% tax on the income from the transfer of virtual digital assets on February 1, 2022, Tuesday. Sitharaman further specified that no deductions and/or exemptions would be allowed here. The crypto tax, being proposed at 30%, is the highest tax band that has been introduced in the country so far. This crypto tax news is also happily welcomed by the crypto industry, founders and entrepreneurs alike. The chiefs of 3 major organizations – WazirX, CoinDCX, and ASQI responded cheerfully to the news as soon as it was disclosed by the Indian government, happy at the progressive stance the government is taking.
In this article, we will talk about the significant advantages and disadvantages of Cryptocurrencies.
A cryptocurrency is a type of virtual currency that uses digital files as money. Normally, the files are designed using the same methods as cryptography. Cryptocurrencies use ‘decentralized control’, which means that they aren’t managed by the government or one person.
Types of Cryptocurrency
There are many different types of cryptocurrency in the market that are taking the world by storm. Some well-known currencies are:
Bitcoin (BTC)
Bitcoin is the most popular cryptocurrency out there and its development is the inspiration and result of the development of other cryptocurrencies. It was founded in the year 2009 by Satoshi Nakamoto, whose identity is revealed. The current value of bitcoin is INR 1514136.15
Litecoin (LTC)
Litecoin was developed in the year 2011. The creator was Charles Lee, who was a former Google engineer. The current market value of Litecoin is INR 3934.91. It is quite similar to bitcoin and is popular as well.
Ethereum
Ethereum was founded by programmer Vitalik Buterin in 2013, he is also the co-founder of Bitcoin Magazine. The current market value of Ethereum is INR 83896.38.
Zcash (ZEC)
Zcash, another form of cryptocurrency was founded by Zooko Wilcox-O’Hearn. This crypto was developed and released in the year 2016. The current market value of Zcash is INRT 4716.53.
Stellar Lumen was created by Jed McCaleb in 2014, who is an American programmer and entrepreneur. as it is cheap it is said to be good for investment. The current market value of Stellar Lumen is INR 8.4.
Cardano
Another cryptocurrency that is taking over the world is Cardano. It was developed by Charles Hoskinson, who is also the co-founder of Ethereum. The current value of Cardano is INR 35.31.
Cons of Cryptocurrency
People are getting more and more obsessed with cryptocurrency. Here are some advantages of Cryptocurrency investments:
Protection from Inflation
It’s one of the great advantages of cryptocurrency as inflation has caused multiple currencies to make their value decline over time. Nearly everycryptocurrency, at the time of its launch, is issued with a set amount. The source code defines the amount of any coin; like, there are only 21 million Bitcoins released in the world. So, as the demand increases, its value will rise, which will keep up with the market and, in the long run, restrain inflation.
Instant and 24 Hour Accessibility
It is possible that you can spend or purchase anywhere you are, and you do not even require a system to use it. Everything can be done from your mobile device, implying that even those with limited usage of technology are still able to make their investments and make decisions in real-time. This convenience is a fundamental feature for the selection and buying of bitcoin and it is being used all over the world to give opportunities for those who would earlier have struggled to become online customers.
Self Governed and Managed
Governance and preservation of any currency are determinants for its development. The cryptocurrency transactions are collected by miners on their hardware, and they get a transaction charge as a reward for doing so. Since the miners are getting paid for it, they keep transaction records precise and updated, maintaining the honesty of the cryptocurrency and the records decentralized.
Secure and Private
Privacy and security have always been a primary concern for cryptocurrencies. The blockchain record is based on many numerical puzzles, which are difficult to decode. This makes a cryptocurrency extra secure than conventional electronic transactions. Cryptocurrencies, for better safety and privacy, use pseudonyms that are unconnected to users, accounts, or saved data that could be connected to a profile.
Ease in Currency Exchange
Cryptocurrency can be obtained using multiple currencies like the US dollar, European euro, British pound, Indian rupee, or Japanese yen. With the help of different cryptocurrency pocketbooks and exchanges, a currency can be converted into another by trading in cryptocurrency, with minimal transaction fees.
Decentralized
A significant advantage of cryptocurrency is its decentralization. The majority of cryptocurrencies are regulated by the developers using them, and the individuals who have a notable amount of the coin. The decentralization assists keep the currency monopoly free and in check so that no organization can ascertain the movement and the value of the coin, which, in turn, will keep it stable and secure, unlike currencies that are controlled by the government.
Cost-Effective Mode Of Transaction
One of the important applications of cryptocurrencies is to transfer money across borders. With the help of cryptocurrency, the transaction expenses handled by a user are decreased to a negligible amount. It does so by eradicating the necessity for third parties, like VISA or PayPal, to approve a transaction. Transactions, whether foreign or national in cryptocurrencies, are lightning-fast. This is because the verification requires very little time, as there are very few hurdles to pass.
Cons of Cryptocurrency
There are many reasons cryptocurrencies are still facing the heat from people. Some of the disadvantages of cryptocurrency investment are:
Used for Illegal Transactions
Since the privacy and security of cryptocurrency transactions are stable, it is difficult for the government to track down each user by their wallet address or keep checks on their data. Bitcoin has been used as a mode of exchanging money for a lot of illegal contracts in history, such as acquiring drugs on the dark web. Cryptocurrencies are also used by some to convert their illegal money through a trustworthy mediator to mask its origin.
No Security in Case of Loss
As with emerging technology, some use incompetence to scam, trick and steal your hard-earned bucks. This has proven to be the problem with digital currencies, so it is necessary to be informed of the security risks. With a few primary security, one can decrease the possibility of causing a loss that cannot be restored.
Conversion of Cryptocurrencies
Some cryptocurrencies can only be patronized in one or a few fiat currencies. This limits the user to convert these currencies into one of the major currencies, like Ethereum or Bitcoin, then through other exchanges, to their wanted coin. By doing so, the additional transaction fees are added in the process, requiring unnecessary money.
Adverse Effects of Mining on the Environment
Mining cryptocurrencies requires a lot of power and electricity, making it extremely energy-intensive. The greatest culprit in this is Bitcoin. Mining Bitcoin requires advanced computers and enormous energy. It cannot be done on regular computers.
No Refund or Cancellation Policy
If there occurs a dispute between involving parties, or if a person wrongly transfers funds to the wallet address, they cannot be recovered by the sender. As there are no rebates, one can generate a transaction whose product or services they never received.
Prone to Market Fluctuations
There are numerous ways that one can use cryptocurrencies, but a lot of people utilizing them at the moment are solely using them as an investment. While eager users are using their digital money to purchase tickets to sporting events, gamble online, or wait for the market fluctuations to work in their favour. Treating your bitcoins as any other commodity may be the way to initiate a more widespread understanding and trust in the new currencies.
Conclusion
With recent developmental and rules regarding cryptocurrency in every country. People are getting more and more interested in them. Of course, there are cons of cryptocurrencies that make people question themselves before indulging in them. However, with technology taking over the world, people cannot deny the pros of cryptocurrencies. It is just a matter of time before cryptocurrency will take over the world.
FAQs
What are the advantages of Cryptocurrency?
The advantages of Cryptocurrency are that it is decentralized in nature, it is not affected by inflation, and transferring money across borders is easy.
What are the disadvantages of Cryptocurrency?
Some of the disadvantages of cryptocurrency are, It is used for money laundering, it is highly volatile and it has high-security risks.
Is it good to invest in Cryptocurrency?
Investing in crypto can be profitable but it is risky too, as it is a highly volatile currency and is prone to market fluctuations.
“Inflation”, you might have read or heard this word often in the Economic section of a newspaper or a news channel.
Inflation is one of the metrics to measure a country’s economy. It is a measure of the rate of increase in the pricing of goods and services.
Let’s say, in 2021, a kg of Apple was ₹100. In 2022, the price went up to ₹120. So, that would mean inflation of 20%.
In calculating a country’s inflation, many products and services such as housing, food, transportation, clothing, medical, and others are taken into consideration. Next, the prices of these products and services are taken into a group and the rate is calculated in percentage, keeping that year as a base year.
As the inflation rate increases, the cost of living will also increase. However, the average income remains constant.
This way, the majority of the country’s citizens may find it hard to balance the cost of living leading to a financial crisis.
So, what can be the possible causes of inflation? This article lists various causes of inflation and the consequences of worst-hit inflation.
Inflation can be caused because of various reasons with demand-pull and cost-push inflation being the most common. Besides this, a country’s economy can also be shocked due to various factors as discussed below:
As the name suggests, this effect is associated with the growing demand for goods and services. demand-pull inflation may occur when the demand is higher than the economy’s ability to meet those demands.
With increasing demand, the prices may rise and the consumers will have to purchase at those prices causing disbalance in the economy.
Take an example of a music concert. If the number of seats is less and the demand is high, the ticket prices would eventually be increased and sold to the ones who can pay for them.
Demand-pull inflation usually happens in a growing economy and is not always a negative sign. In fact, the Federal Reserve suggests that inflation of 2%-3% is considered healthy for the economy.
2. Cost-Push Inflation
This is one of the most common reasons for inflation and increasing prices. When the cost of manufacturing or raw materials increases, the companies will increase the product prices to meet the profits. This increases the burden on the consumers as the prices are controlled by the companies or the industry.
Cost-push inflation may happen if the government has increased the taxes on certain materials or the new laws have made imports or exports expensive.
The other possible reason could be the increase in taxes. If the government has hiked certain taxes that may affect the corporations, they are likely going to increase the pricing to meet the production costs.
Inflation Rate in India
3. Devaluation of Currency
Devaluation is defined as the lowering of a currency’s value, which then reduces the currency exchange rates. Devaluation affects inflation indirectly.
When the currency value lowers, the export rate becomes cheaper resulting in increasing exports to the foreign countries. Further, the import rate increases and the devalued country results in increased imported products.
As a result, the citizens turn toward domestic products, increasing the demand. When the demand surpasses the production, the cost increases, resulting in the demand-pull effect.
The recent economic crisis in Sri Lanka with an inflation rate of 17.5% is attributed to the devaluation of its currency.
An increase in the circulation of currency can be one of the major causes of inflation. Printing or circulating excessive money is never a solution to support the falling economy.
Printing more notes, cash, or coins that country’s economic growth is only going to devalue the currency and bring it down.
The lower the costs of export, the higher will be the dollars and foreign buyers.
Again, this results in demand-pull inflation increasing the costs of production. This, in turn, puts financial pressure on the citizens of the country resulting in higher prices and increased inflation.
One such example is Zimbabwe’s increased money supply in 2008. The country was already in debt when its government decided to increase the money supply.
Due to the increased circulation of currency, the demand skyrocketed resulting in a shortage of supplies. As a result, the cost of production increased and the suppliers had to raise the prices.
The government then tried to control the prices of basic goods, but this cost was much lower than the cost of production. And, the supplier wasn’t left with many production units.
In 2008, the country’s inflation rate reached a shocking 231,150,888.87% causing hyperinflation.
5. Wage Push Inflation
An increase in the average wages of the workers or employees can be a contributing factor to inflation.
Higher wages and the increased cost of production are tied in a circular loop. If the rise in wages is high, the companies will have to increase the costs of production or adjust to the lower profitability. This is a case of cost-push inflation. Now, if the wages are increased, the companies may cut off the employees and this will only increase unemployment.
That said, the general rise of wages to keep up with the increasing inflation will have put less pressure on the economy.
What are the consequences of Inflation?
As inflation continues to grow, it may affect your cost of living, investments as well as future retirement plans.
The increasing prices may reduce the consumer’s purchasing power cutting off the costs of living. In worst-hit inflation, the citizens may even fail to meet the basic necessities.
This would result in lower profits, higher layoffs, and an increased rate of unemployment. To combat this, the countries may seek loans from the World Bank, IMF, and other financial organizations.
Further, the growing economies may lend loans to the countries facing hyperinflation with higher interest rates. This may lead to higher debts and worsened inflation.
Conclusion
Inflation can make or break a country’s economic growth. Optimal inflation of 2%-3% is considered positive whereas the inflation rate of 50% or above in a month can result in hyperinflation.
The above-mentioned causes of inflation should be regularly checked by the government and the financial institutions in the nation. The balance between demand-pull and cost-push would bring stability to inflation.
FAQs
What are the 5 causes of inflation?
Demand-Pull Effect, Cost-Push Inflation, Devaluation of Currency, Increase in Money Supply, and Wage Push Inflation are the 5 causes of inflation.
What are the main causes of inflation in developing countries?
Government spending, money supply growth, world oil prices, and the nominal effective exchange rate are the main causes of inflation in developing countries.
India is the birthplace of cultural, grassroots, and frugal innovation. The population of over one billion people makes this an exciting geography for startups to build repeatable and scalable business models. The beauty of startups is that they provide their employees freedom, the opportunity to innovate and explore rather than just to engage in unproductive work. There exists black money within this rising economy of startups.
“The Indian startup ecosystem is said to be the third largest in the world having added over 1,300 tech startups in 2019. Number of Indian unicorns could increase to 95-105 by 2025,” says Nasscom president Debjani Ghosh.
Home of the largest e-commerce deal between Walmart and Flipkart, 31 unicorns and counting, and plenty of untapped opportunities — it shouldn’t come as a surprise that India has been home to some of the biggest startup success stories. Over the years, Indian startups have found success across sectors, with startups in enterprise tech, e-commerce and travel tech grabbing global attention. There has, however, been a grey cloud spanning the growing startup industry in recent years, something we are all familiar with – black money.
Canadian-Indian writer Rohinton Mistry says, “It is so much a part of our white economy, a tumour in the centre of the brain — try to remove it and you kill the patient. A 2015 FICCI report estimated black money in India to be as high as 75 per cent of the GDP.”
In today’s world, it is difficult to explain how a social anomaly could appear in the world of budding talent, making the next generation soar to the highest levels of recognition and profit. This anomaly increases the need for black money in startups or businesses. The purpose of this case study is to analyze the entry of black money into the industry, the factors that influence it, and how it is being whitewashed, as well as the impact this has on our economy.
Current Scenario and Analysis of Black Money in Startup World
Let’s look upon the case where a reputed startup lawyer (let’s name him ‘A’) in the capital has worked with startups including two well-known hotel room aggregators, a funded media startup and few e-commerce firms. He is also involved in deals with a well-known real estate group in the country that is trying to dabble into tech startups. He gives a shocking revelation: “Some expatriate businessmen are using startup investing as a way to move black money into India.”
Here’s the underside, suppose you have $10 million cash parked in Mauritius. You look for tech startups where you can take a majority control or create an entity that can furnish a website, an app and a small team in place. You incorporate the company as a private limited entity and also register an overseas subsidiary. Once a legal structure is in place, you start routing the overseas money into that technology company.
The routing can happen on the seed stage – A funding round. Now to embezzle the funds, from that startup money you can buy a luxury car and other assets, pay yourself, your kin huge sums as directors. You run that company for a period of two years or more till you’ve routed all the money into India. Once done, you can simply close that startup, declaring the company bankrupt and paying off creditors and share-holders which might be your own companies. Even if they have not routed the money overseas, dabbling in startups by opening up mentorship firms has become easy and a glam route to use that money legally.
“Am not saying all such firms are using startups as a means to turn black money into white but this glamorous route has started to be misused in India,” says A, a managing partner of the law firm, requesting anonymity.
Another lawyer (let’s name him lawyer B) who is brokering deals for a Gurgaon-based fashion app and another small hotel rooms aggregator ratifies it. His firm which specializes in transaction advisory for tech startups says that there are many ways dishonest businessmen launder.
An unsavory investor makes his family members the board members of that startup.
Other companies of the same group act as vendors to that startup and quote ridiculous prices for that service or product.
These investors ask for too much equity and control of the startup (often over 70%). They wish to keep their kin on board.
They park the money in a trust-friendly jurisdiction, such as Switzerland, before it is moved to a tax-efficient country such as Cyprus, where the taxation levels are very low or have no taxes. It is then routed to a tax-friendly country like Mauritius, before reaching the final destination in India. India has a Double Taxation Avoidance Treaty (DTAA) with Mauritius.
Trade mispricing is a tool used to siphon off money, plays an important role in bringing money back into India. Instead of inflating invoices, a business can under-invoice and export machinery or software. One can open a company to sell bags or a restaurant. The business may not take off, but the owner can still show cash sales of Rs 1 lakh to Rs 2 lakh a day. Slowly, but surely, all money would be legitimate one day!
Along with the economic effects, black money also has social consequences. Some of them are mentioned below:-
Loss of revenue to the government and running of parallel economy in the country – It is the increase and spread of black money that poses a serious economic threat since it leads to a decrease in government revenues. If only some part of the black money that has been in circulation in the economy could have been paid as taxes to the government, it would have benefitted the Indian economy to a large extent.
Vicious circle as a result of black money and corruption – Black money has added to corruption by the illegal transactions made to hide the black money. Bribes are given by the people to bureaucrats, government officials, etc. This forms a vicious circle which is never going to end unless some serious step is taken by the government.
Effects on national income and real capita income– Black money is a result of revealing low income to the government while paying tax by people which results in low national income of the country. The national income of the country will take a big leap if the amount of black money in circulation is backed up to the national economy of the country. This will also increase the quality of life for the whole country.
Higher taxation and inflation – The main reason behind the taxation is to earn revenues for the expenditures done by the government to make a balanced budget. Therefore, it is obvious that if the amount of black money which the people are hiding from the government is revealed and included in the budget of the government then the tax rate will surely come down as the revenues which the government wants to earn from the people by imposing high taxes will already be with the government. Therefore the amount of goods and services which were there in the market according to the accounted money gets a hike in their prices which results in inflation.
Difficulty in the formation of monetary and fiscal policy – This is an obvious impact as the government while making these policies is not able to count the exact national income because of the hidden black money which makes such policies unrealistic.
Increased criminal activities in society– Black money usually gives rise to various illegal activities in society and corruption is one of them. The duration of the election is also the time when the illegal use of black money can be seen. Various terrorist activities have backup power of hoarders of black money which is even harmful to the whole country. The illegal weapons with various groups of unsocial elements are usually bought up by the use of black money.
The problem of black money should be solved in a real sense and a very rational manner.
First of all the problem is to be dealt with morally. The morals of the people in the society must be raised.
The tax system should be realistic in nature.
The authority which is responsible for the collection of taxes should be honest, without any corruption.
Various incentives should be given so that people voluntarily agree to disclose their real income.
The Economic Intelligence unit must be maintained thoroughly and should be looked after.
The corruption in administration must be stopped at all levels.
Startups should be aware of individuals who ask for higher credit in the company.
Limited kin involvement should be allowed.
The accounts must be looked after by the team and not the angel investors.
The government alone cannot curb this issue completely from society. Making different policies, laws, acts and legislation will not work alone. For the implementation of these laws and policies, every citizen has to come forward. People should understand why it is important to pay tax and should stop evading their income and should not lead to the generation of black income. Every citizen should make some contribution to the development of the country in the form of paying taxes. By doing this, the economy will definitely decrease its black money, as well as startups will not need black money to operate.
The social anomaly could appear in the world of budding talent, making the next generation soar to the highest levels of recognition and profit. This anomaly increases the need for black money in startups or businesses.
What is Black Money?
Black Money is the money that is earned through illegal activity and that money is not recorded for tax purposes.
Are Startups a way to convert black money into white?
Not always, because even startups fail. So if the startup fails, say in 2 years, then your money is gone. But it can be a way to convert black money into white. As the Startups have to pay taxes on raised money.
Can a person convert black money into white through the stock exchange?
No, even the money that is invested in the stock market is invested via banks. So if one breaches their bank limit, it automatically catches the eye of IT officials.
What are the best ways to convert illegal money to legal money?
There is no other way to convert black money into white besides paying taxes. If there would have been a way then no person has to leave their native country and roam like a fugitive.
