Purchasing Power Parity, abbreviated as PPP, is an economic theory that evaluates the value of currencies based on the prices and availability of goods and services across different countries. In other words, the primary objective of the PPP is to equalize the values of currencies in terms of how much can be bought in each economy. For example, when a PPP estimator is used, we take into account the difference in the standards of living, including the use of currencies which can be said to go beyond the mere consideration of exchange rates.
Why is PPP Relevant for India?
The Indian economy is very diverse and has a high difference of costs prevailing in urban and rural areas respectively. It is here that the purchasing power parity becomes important, as it takes into consideration the levels of prices prevailing domestically, thereby giving a more accurate comparison of the way of life in India as opposed to the United States. As of now in 2020, the PPP rate in India can be pegged at approximately 18.959 INR for 1 USD. This means that the prices one would expect to find in India are far lower as compared to these in the United States. Geopolitical foreign investors and economists as well as ordinary expatriates will gain a lot from calculating India’s PPP mainly for the purposes of financial planning and making investment and consumption decisions abroad.
The Mechanism of a PPP Calculator
A PPP calculator is constructed in such a way so that the effect of currency exchange is made redundant and instead the purchasing power parity is used. To explain further, the market exchange rate of dollars to Indian rupees may be about more than eighty, in contrast to the PPP exchange rate figured at about 18.959 meaning the given dollar may have a larger and prolonged use in India more so in purchase activities. This is done on the basis of several countries measuring the price level of each economy for the same hypothetical basket of goods.
How Its Done
Estimates of PPP from the World Bank and International Monetary Fund (IMF) are based on a lot of information gathered from different countries. In the case of India also, the Reserve Bank of India and other institutes also study and release information related to PPP from time to time. The PPP rate is determined when the price of an identical basket of goods in one country is quoted to its price in another country.
How it Affects the Comparison of Salaries
Many expatriates make use of the PPP calculators to check whether they will be able to maintain the same way of life even when offered a salary in India. For example, a salary of $50,000 assuming that one is in the United States is different when in India due to the nominal convertibility or the PPP conversion rate. With the PPP conversion, the wage level which was statutorily lower in the employment country of origin will literally be significantly higher due to the cheap expenses in the employment country of search.
Real-Life Applications of PPP in India
International investment decisions
When assessing countries for potential investments, foreign investors may also refer to the Purchase Power Parity index. India, because of its low-cost economic structure, tends to present a higher return on investment in areas such as Information Technology, production and service delivery.
Expatriate Cost of Living Adjustments
How much a dollar stretches in India is calculated with the aid of a PPP calculator thereby assisting expats in understanding lifestyle cost differences in India compared to their country. This adjustment is also useful in determining what salary to offer expatriates moving to India for work.
Trade & Price Strategies on International Markets
The conducting activities to penetrate the Indian market is where the investors’ argument based on the Purchase power parities price calculations can be used. Understanding the earning influence of the Indian consumer, companies can adjust their price level policies accordingly.
How to Use a PPP Calculator: A Step-by-Step Guide
Here is one exemplary method of utilizing a PPP calculator using the example of the United States and India.
Add Region and Currencies
Select the currencies you want to compare (USD, INR) and the geography.
Pick Basket of Goods
A number of these calculators offer the option of goods categories like housing, food, transportation, which result in more precise PPP estimates.
Let’s suppose the calculator indicates a PPP rate of 18.959. In other words, it means that the price level of consumer goods in India is much lower than that of the goods in the USA. An American who relocates to India, for instance, may realize the value of this figure given that $1 is able to purchase goods worth 18.959 INR in that country making his/her stay economically viable. American can rent an usd apartment in India for 1.3 Wat 1188 pesos in hundi rupiya looking well within their limits.
Why PPP Matters More Than Nominal Exchange Rates
The nominal exchange rate indicates, in simplistic terms, the market value of each currency and does not take into account the purchasing power adjustments as appreciated in the PPP rates. For instance, converting US dollar one (1.00) to 80 Indian Rupee (INR) does not factor in the cheaper Indian prices.
PPP and Inflation
In the long run, the inflation rate in India, acts to increase or decrease the value of Indian real GDP in dollar unit terms, and thus also changes its PPP of India. This ever-changing scenario affects foreign direct investments (FDI), expatriates’ salary, and even the state itself.
Challenges and Limitations of PPP in India
Challenges Related to the Collection of Data
The respondents explained that calculating the Purchasing Power Parity involves extensive collection of data, which may be hard to obtain especially in developing countries like India where prices can differ from region to region.
Problems Related to the Need for Uniformity
It is difficult to create a uniform basket of goods due to qualitative and quantitative variations of goods in the Indian economy. These factors may be too complex to address and a PPP calculator may tend to exaggerate them or undermine their significance.
Unpredictability of Currency
The need to draw the line between purchasing power parity and the effect of exchange rate variation, especially in developing countries avoids an economic interpretation of the concept. This is especially true where economic and political instability is rife, and in some cases, recent histories of such situations.
PPP and Economic Policy in India
The Indian government and the economists make use of the data on the purchasing power parity of the countries in order to come up with more accurate comparisons of GDP figures around the globe and also estimate the economic power of India in relation to the other nations. Similarly, the purchasing power parity is applied by policymakers to come up with the measures aimed at protecting the consumer’s purchasing power, especially inflation control and aiding the lower income groups.
Conclusion: The Future of PPP and Economic Planning in India
India’s GDP adjusted for purchasing power parity (PPP), which ranks among the highest across the globe, indicates the growing importance of the Indian economy over the years. But with global price levels and inflation rates undergoing change, it is imperative that forecasting economic tendencies and managing international finances will involve monitoring the trends downturn in purchasing power parity (PPP) indices.
