What is inflation? 

In simple terms, inflation refers to an increase in the price of goods and services over a period of time. To illustrate, if five chocolates cost Rs 10 in 2020 and if the price went up to Rs 15 in 2024, it simply means that the cost of chocolates has increased over a period of four years. 

What causes inflation? 

Inflation can happen when the demand for products or services exceeds the supply. This is referred to as demand-pull inflation. Inflation can also arise when the manufacturing or production cost of goods increases, disrupting the supply chain or what is unavailable in the market. For example, India’s major importers of oil were Iraq and Kuwait. This is known as cost-push inflation. When Iraq invaded Kuwait in 1990, it led to a situation of oil crisis in India as the country relies on crude oil to meet its demand. Sometimes, in the event of natural calamities such as earthquake, tsunami or floods, or geopolitical tension like Israel and Palestine war, the supply of the goods that the consumer wants can be disrupted.  

Who monitors inflation? 

The Reserve Bank of India (RBI), the central agency, monitors the inflation rate in India. Usually, when the inflation rate increases, the central bank increases the key lending rate on loans and deposits, discouraging consumers as well as businesses from taking out a loan. When inflation is down, the RBI cuts down the interest rates. This encourages consumers to take loans.  

For fixing the interest rates to tackle inflation, the RBI constituted a six-member monitory policy committee (MPC) headed by Governor Shaktikanta Das. MPC was established on June 27, 2016. Once every six months, the central bank publishes a document called Monetary Policy Report to explain the reasons behind inflation.  

How to calculate?

 The rate of inflation calculated by the National Statistical Office (NSO), under the Ministry of Statistics and Programme Implementation, is based on the consumer price index (CPI), a key economic indicator. It measures an economy’s inflation level by considering the basket of goods and services, such as food, transportation, clothing, health, that typical consumers purchase. Based on this economic measure, policymakers can make informed decisions about taxes and interest rates. 

How does it impact us?

 As most of the Indian population belong to the middle class, inflation can have a huge impact on them in several ways. Inflation does not lead to an increase in wages or salaries as they are fixed earnings. This decreases the purchasing power (ability to buy) of consumers, and they become more conscious of buying. For example, if inflation has touched 15% and the salary of an employee remains the same as it was at 10%, then he/she is earning 5% less. Rise in price of household items like sugar, wheat, gas, etc forces the consumer to spend more to maintain a good standard of living. All this can lead to stress and anxiety, taking a toll on the mental health of a consumer. 

Covering a wide spectrum of Indian sectors, the first Union Budget of Modi 3.0 focused on MSMEs, employment, skilling, youth, and the middle class. Yet, the Budget as such has failed to address several concerns of the real estate sector, including direct incentives to boost the affordable housing sector. It was widely anticipated that affordable housing will get a major boost in the current Budget because its performance has been on a decline.

With an eye on the housing needs of the urban poor and the middle class, the government has announced that it intends to construct an additional one crore homes under PMAY Urban 2.0 with an outlay of ₹10 lakh crore. It remains to be seen how effectively this would work for the benefit of those in the affordable housing segment.

Mega allocation for the Hyderabad-Bengaluru industrial corridor and Vizag-Chennai corridor will boost growth along these corridors and consequently boost real estate growth there. The Finance Minister also tried to rejuvenate the MSME (Ministry of Micro, Small and Medium Enterprises) sector, which does have a multiplier effect on overall economic growth — with the implied positives for real estate being a collateral beneficiary of such growth.

The credit guarantee scheme for MSMEs will help provide impetus to overall industrial development, and this can have a rub-off effect on the real estate sector. The pandemic had a catastrophic impact on the MSME sector, which slowed down the demand for affordable housing from 2020. Affordable housing demand may gain momentum once the economic impact of the pandemic subsides for this target audience.

This is certainly pertinent — the affordable homes category (less than ₹40 lakh) has been seeing a decline in overall sales since the pandemic, to approximately 19% in H1 2024 from over 38% in the period before the pandemic in 2019. Consequently, this segment’s percentage share of the total housing supply in the top 7 cities also fell to 18% in H1 2024 from nearly 40% in 2019. Any boost to this vital segment is therefore welcome.

For individual taxpayers under the new tax regime, the increased standard deduction limit to ₹75,000 from the previous ₹50,000 along with the new income tax slabs implies savings, but hardly enough to boost housing demand.

With regards to the withdrawal of indexation benefits announced in the Budget, factors such as the amount of appreciation will determine whether the new tax (minus indexation) will be advantageous or disadvantageous for sellers. It is best to consult a tax expert for this, but as it seems now, when the difference between the purchase price and the sale price (in a 10-year period) is higher (say, more than 2-2.5 times), then the new tax regime without indexation is more lucrative for the buyers.

However, when the difference between the purchase price and sale price is lower, then the old tax regime with indexation is more lucrative for the buyers.

The writer is Chairman, ANAROCK Group.