Confidence is the difference between the rich and the poor.

Is our economy doing well or is it about to go into deflation and falling growth? According to some the economy is doing much better relative to other emerging market economies and our growth rate will overtake that of China. GDP is expected to grow at 7.5%, retail inflation has fallen to 3.66%, the Current Account Deficit fell to $1.3 billion in the quarter ending on 31 March, compared $8.3 billion in the previous quarter, our foreign exchange reserve was $352 billion as on 18 September and Foreign Direct Investment was $34.9 billion in the last financial year. However, others were afraid of deflation as Gross Value Added deflator was negative for both manufacturing and services and only positive for agriculture. Foreign Institutional Investors have taken out over Rs 40 billion from shares and around Rs 16 billion from debt, which is probably why the rupee was trading at around 66 to the dollar. Responding to these numbers the Reserve Bank surprised everyone by cutting interest rate by 50 basis points on 29 September, despite household inflation expectation rising to over 10%. Studies from other countries show that inflation expectation of the public is consistently higher than the real figures. Does that mean that people are stupid or are the goods and services monitored by the government to calculate inflation levels different from what people are buying and how does it affect behavior? It is a source of pride that India ranks third behind China and the US in Purchasing Power Parity which calculates the buying power of the same amount of money in different countries because of difference in exchange rates. The trouble is that numbers can only measure different aspects of the economy such as growth rate, exchange rate, inflation rate or PPP but it cannot measure people's sentiment. People in the west have the luxury of knowing that social security is guaranteed for every citizen, which means that they do not have to save and can enjoy whatever they earn. They trust their government to provide them with first class services for the taxes they pay and to keep a control on prices. In India perception of the economy depends on who you are. The rich live in a different world of luxury holidays, cars and jewellery. The poor depend on subsidies targeted at them, which diverts government from spending on infrastructure to create wealth, to distributing handouts. The middle class gets nothing for the taxes it pays, suffers poor services in silence and survives on its own resources. How is it doing? Gross financial savings are the lowest in 25 years which means that spending power is low. This is reflected in poor demand which means less need for new investment. People make the economy. Unless we have confidence it will not improve.