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Difference in Purchasing Power and purchase-ability!
Recently our good Finance Minister Mr. Pranab Mukharji announced in Bengal that Finance Ministry is endeavoring to come with some packages by which a number of employment opportunities will be developed in the near future. I was very happy to read that but as I continued further found the mention of Purchasing Power and it was said that this employment package shall improve ordinary man’s PP with these economic packages. I must admit that, am not aware of the details of the package but considering the general format of the proposal it appears that it is aiming at helping generate employment opportunities at the lower levels.
You are now wondering what I mean by that? Yes, you are correct; I mean by that the lower level employment has nothing to do with PP. I know I am confusing you my dear readers but wait I shall explain the point. In other word I may say that Purchasing power is not improved by such meager employments. Here we shall try to understand difference in the two phrases, Purchasing Power and Purchase-ability.
What is Purchase-ability? And what is Purchasing Power? They are different. Purchase power is related to the person’s capacity to buy “regularly” non-essential commodities. While Purchase-ability is related to the person’s capacity to buy essential commodities. Here I hope the matter is becoming a little simpler. Now the question is what is non-essential commodity and what is essential commodity? Well, it is not very difficult to understand the difference in these two phrases. Essential commodities include as you can very well understand food, clothes and shelter. A person needs minimal of these basic facilities to live properly. Here simple food which includes grains, pulses, edible oils, sugar etc. clothes include normal essential clothes that keep the individual properly dressed and last is shelter again that hints at some simple and safe housing facility. When a person has the capacity to purchase these minimal requirements it is called person’s purchase-ability to get them. This does not include any expensive varieties coming under these categories. To understand subtle difference in that we shall take an example of rice. We have rice a very common cereal of everyday meal is available in various prices. In Mumbai I see that different varieties of rice are sold at prices ranging from Rs. 14 to 80 and still costly. Rice is essential but the varieties of higher prices do not come under essential commodity. A person has to buy rice whatever the price and so he has no choice and has to buy the rice at the most affordable price that suits his purse. A very poor man will buy 14 rupees rice and as his income improves may switch over to more costly variety! This analogy can be further extended to other necessities of life. That means a person has a choice of the material he or she can buy to make living possible. As the income improves we see that people inadvertently switch over to better class material coming in the same category. A person who was using rice of 14 Rs, on improvement refuses to take that rice and opts for rice of 30 or 80 Rs. Or even more costly since he can afford it. You must be wondering why I am giving all these details of rice price; there is reason for that. Let us take the example of the poor man for whom our finance minister is developing packages.
When that package will be implemented; he claims that; large scale employment will be created but he has not spelled what shall be the range of income level and so we will imagine some range for the sake of studying the proposal. Whatever be the range he has in his plan, it cannot be too far from the one we are envisaging.
As affordability improves at a certain point that affordability is called power! That means capacity to buy costly and more costly variety of the same category is called enhanced power of purchase. That means as the income improves the ability becomes power but when exactly that happens is to be seen. As the person gets this power of purchasing due to enhanced income he desires for non-essential commodities. As he gets that capacity we can say that the person is having Purchasing Power. The question here is where this margin falls. Before we go further in this study we must know what are the non-essential commodities. Broadly speaking all costly basic commodities in food, clothes and shelter come is this category along with those other commodities such as washing machine, refrigerator, car etc comes as non-essential commodities. That mean one can actually live without these facilities.
Why non-essential commodities are important to decide PP
This is an important question because GDP (Gross Domestic Produce) is based on the condition of the production of these and such products and the condition of industry in the country is base on that. Not on the production of essential products of lower prices. If people do not purchase these products the value of GDP is of no consequence and to fulfill it, industry will have to resort to export of these products. Ideal condition of the economic situation is all GDP is consumed within the country. In that situation we say PPP with GDP. Here PPP means purchasing power parity, here parity with GDP. Parity means matching or on par.
To explain my concern about the claim Mr. Mukharji has made; that his package will improve PP, we shall take an example of conditions of different pay scales in Mumbai. We shall take five different pay scales; 5000, 8000, 15000 20000 and 25000 per month.
Person getting 5000 rupees per month can barely manage his family in that amount in Mumbai and so he comes in poor class. His all salary is spent in essentials, at the end of the month he has no money to do, and he miserably waits for his next pay packet! He purchases rice at 14 rupees. All essentials he purchases are of low and very low value and so he does not help improve PP. He cannot even think of buying any non-essential. However he has attained some purchase-ability.
Person getting 8000 rupees per month can manage his family if it is small and he also comes in poor class but he can buy all essentials of slightly better price and so he is comparatively in better position however, he finds that at the end of the month his pocket is empty. He purchases rice of 20 rupees. He comes in poor class. All essentials he purchases are of some what better price but still they are of low cost and so he does not help improve PP. He thinks of some non-essentials but keeps dreaming about them. However he has attained better purchase-ability.
Person getting 15000 rupees per month can manage his family expenses better than the previous one. He comes in lower middle class and he can afford rice of 25 rupees. At the end of the month he may have some funds still in his pocket but that he wants to save for future. He is important for Banks as he may be interested in their investment plans. Occasionally he may buy some non-essential but he is not a regular buyer. This man is on the border but not contributing for PP consideration. So we can say he is not improving PP. However he has attained comfortable purchase-ability.
Person getting 20000 rupees per month can do well. He purchases Basmati rice occasionally but for every day he prefers some slightly lower priced rice (broken Basmati). He does save money or may instead spend it for some really good non-essentials. He comes in middle class category. He is important for Banks as investor. He may be doing some investment in shares also. This man is on the verge of the PP level and he does improve PP.
Person getting 25000 rupees per month is very well but now he thinks of using only best material for his daily consumption. He may think of some really costly purchase of some sort and that may put him involved in Bank loans. He comes in higher middle class category. Wanting to buy a car or new home. This man improves PP.
All people earning more than that are all important from PP consideration. Now my question to Minister is, Sir, how many people will be getting salary of monthly income of this range. If his plan is creating employment earning up to 15000 per month then that package is of no consideration for PP improvement. He should make clear what is the percentage of people getting more than 20000 per month in his package. If that percentage is as high as 40% then that package can be considered as of some value for PP consideration otherwise his claim is false.
I have taken conditions of Mumbai but in other parts of the country conditions may be different and in that case the categories I have put could be slightly different. A higher middle class person in Mumbai may be considered as rich in Orisa or Nagaland. That means the level of higher middle class will be different at different income levels at different places. This again makes it very essential that he explains value of his package in different parts of the country. We give dearness allowance to employees to surmount extra cost of living in cities and that way if he has provision for such corrections in his package should also be made clear.
He should also be very clear whether he wants to give Purchase-ability or Purchase Power. At present, financial condition of most of Indians needs development of Purchase-ability. In case of most of them Purchase Power is a fry cry. Ambiguity in his talk makes his promise worthless.
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