“Ridiculous, Insane, Irrelevant…why the hell does one need to go to India to have a Big Mac, I have a McDonald’s just around the corner!!”
That was the reaction I got when I suggested to one of my friends that having a Big Mac in India might be a good idea. What we were discussing was the recent battering of Indian Rupee and his view was that an Indian national working overseas has gained with the falling rupee.
My stand was that well in pure conversion terms, yes every Dollar, Dinar, Euro or Dirham fetches more rupees but the steady inflation rate of over 8% has made the cost of living in the country higher as well. India is no longer as cheap as it used to be and the cost of living in bigger cities can be more or less similar to any other developed country.
In case you have not guessed by now this friend of mine is not an Indian national.
However to prove his point that indeed things are not as expensive in India he pulled out the Big MC Index on his beloved tablet. Here is what I saw – INR is undervalued by over 50% against the USD.
The interactive index can be viewed at – http://www.economist.com/content/big-mac-index
His defence being that if a McDonald’s Burger costs only USD1.5 in India and is USD 4.56 in US then how can one say things in India are not cheap. This was a classic Purchasing Power Parity evaluation and I could see that no matter what I said there was little I could say to show him the bigger picture. So my instant suggestion was ” Want to eat a Big Mac – Go to India!!”
Well we had a good laugh after our banter but this also made me think that the well reported reasons in the media and business dailies just do not seem to hold well against the traditional – Interest Rate Parity and Purchasing Power Parity theories.
With a interest rate of 7-8% on the government securities and purchasing power parity mismatch, as shown by the mc index, the currency is grossly undervalued. Of course, the Current Account Deficit and the huge spend on Gold and Oil import is a big reason for dollar demands for India.
The deficit issue can be tackled by a two pronged approach – making the country self-reliant for energy needs, and increasing exports. The vast coastal lines, desert areas, and rivers are all perfect venues for investing in alternate sources of energy and exports could be boosted by reaping benefits of the weak rupee. Gold is a bigger beast to tackle as I cannot see how India’s love for gold can ever diminish 🙂
On a side note I would still travel to India to have a McDonald’s burger – not because it’s cheap, just so I can get the McAloo Tikki.