Purchase power parity USD vs INR

[old_city_fella]

I have been researching to answer my own question :)
here is what I found:

India's per capita income (nominal) is $1032, ranked 139th in the world,[24] while its per capita (PPP) of US$2,932 is ranked 128th ( data is for the year 2009 ). http://en.wikipedia.org/wiki/Economy_of_India#cite_note-imf2-0

The numbers have steadily improved over the preceding four years (see row4) http://www.imf.org/external/pubs/ft/weo/2009/02/weodata/weorept.aspx?sy=2006&ey=2009&scsm=1&ssd=1&sort=country&ds=.&br=1&c=534&s=NGDPD%2CNGDPDPC%2CPPPGDP%2CPPPPC%2CLP&grp=0&a=&pr1.x=40&pr1.y=15

For the sake of calculation, a nominal income of $1000 would have a purchasing power of about $3000 when corrected for PPP. ie, an income of $100k in USA would be equivalent to an income of $300k if u were living and spending in India.

100k USD income in USA = 33k USD income in India = approx 15L INR income in India. (1 USD = 45 INR).

Putting in perpective, some of the MBA grads get about 1Cr/year package in India (rarely much more).
An income of 1.05Cr /year ( 8.75L per month) is equivalent to an income of 700k USD in USA!!!

Do I make sense here? please correct me if I am wrong.

[dbs]

Your calculations make obvious sense. However, there are a few more factors to take into account.

1. PPP is post direct taxation. That is that after tax spending power is being compared.
2. Does not take into account perks.
- In USA there could be medicare, SS controb, etc.
- In India, ther would be Employer's PF contribution. I am not too conversant with the perks taxation but that would have substantial affect on equivalent earnings.

[old_city_fella]

1. PPP is post direct taxation. That is that after tax spending power is being compared.

1.Thanks for the info. I didnt know that.
However, as long as it is post taxes on both ends, the comparision is fair and our conclusions should remain unaltered.
Since, we are using the info just to conclude that 1 USD = 15 INR in terms of Purchasing power.
Correct?

2. Does not take into account perks.
- In USA there could be medicare, SS controb, etc.
- In India, ther would be Employer's PF contribution. I am not too conversant with the perks taxation but that would have substantial affect on equivalent earnings.

True. Since the benefits by an Indian employer are far lower, the pretax income should be higher to compensate.
Benefits in US account for 10%-40% of basic salary. (in some senior employees of federally funded institutes, it maybe as high as 80%).

[dhanu]

Putting in perpective, some of the MBA grads get about 1Cr/year package in India (rarely much more).
An income of 1.05Cr /year ( 8.75L per month) is equivalent to an income of 700k USD in USA!!!

Do I make sense here? please correct me if I am wrong.

I think that is not really correct. AFAIK, an MBA grad may get 200KUSD/Yr package in US (or similar in UK in Pounds) not in India. But Indian media reports 1 cr salary by converting their USD salary figure.

I think salaries should not be compared directly. I compare the effective savings. For example, if you are saving 2000USD per month, that means about 100KRs per month (assuming 1 USD = 50 for the sake of easy calculation). How much should your salary be in India for you to be able to save 100K per month? == (100K+ Expenses)*12/(1 - Tax rate).

So if your expenses are about 50KPM: 150000*12/(1-eff tax rate) = 18L/(1-.20) = 22.5 LPA

Similarly, US salary would be 2000USD+1500USD for expenses = 4500*12/(1-.25) = 72000 USD PA

So, I think 72KUSD is comparable to 22.5 LPA in India. But by directly covering 72000USD to INR you will get 36LPA.

(So should 36/22.5 correspond to the PPP between INR and USD? IMNS).

[old_city_fella]

I think that is not really correct. AFAIK, an MBA grad may get 200KUSD/Yr package in US (or similar in UK in Pounds) not in India. But Indian media reports 1 cr salary by converting their USD salary figure.

That does make sense.

I think salaries should not be compared directly. I compare the effective savings. For example, if you are saving 2000USD per month, that means about 100KRs per month (assuming 1 USD = 50 for the sake of easy calculation).

You do bring up a valid point of comparing savings instead of salaries. However, I think we should not convert the US savings by conversion rate ( 1USD = 50INR in your example) but convert by the purchasing power parity.

So to rework your example, a savings of 2000USD p.m.( 1 USD = 15 INR) equals 30,000INR pm.
assuming monthly expenses to be 50,000pm at effective tax rate of 0.25, the comparable annual
salary would be (30k+50k)*12/0.75 = 12,80,000 INR p.a.

It does seem low for a returning NRI, however, those are the real numbers when we get there and thats how our relatives and friends are leading an equally good quality of life - materialistically speaking.

How much is enough - would be a different question, however.

[dhanu]

You do bring up a valid point of comparing savings instead of salaries. However, I think we should not convert the US savings by conversion rate ( 1USD = 50INR in your example) but convert by the purchasing power parity.

I don't think using PPP to convert saving would be appropriate because saving is in absolute amount in the bank. 2000USD is really equal to 100000INR. But price of Milk in US in USD is not comparable to price of Milk in India in INR. So, IMHO, PPP comes into picture when you are comparing the money spent on consumer items.

In fact, I am now thinking, monthly spending i.e. 1500USD (if that is your monthly expense in US) should be comparable to 50000INR (if that is your monthly expense in India). Further, PPP should be derived from this instead of the other way round. So, in a way, one can have his own customized PPP. Of course, the actual reported PPP is probably just the average of the same thing for a large set of people.

[old_city_fella]

I don't think using PPP to convert saving would be appropriate because saving is in absolute amount in the bank. 2000USD is really equal to 100000INR. But price of Milk in US in USD is not comparable to price of Milk in India in INR. So, IMHO, PPP comes into picture when you are comparing the money spent on consumer items.

If you want to just save money in cash and compare the savings in terms of currency units, then yes, we should stick to the conversion rate (1 USD = 50INR).

However, if you are thinking of the next step, ie, what that money could buy - consumer goods, milk, real estate etc., then the Purchasing power comes into picture.
What the saved amount is (in nominal terms) versus what the saved amount is worth (in terms of goods it can buy).

As is discussed earlier, the cost of living or real estate would be different in Delhi versus in Nagpur. In other words, the saved amount may be worth less in Delhi versus in Nagpur.

A given item may be worth 1 USD in USA, and same may be worth 20 INR in Nagpur, while it sells for 40INR in Delhi.
To posses a similar purchasing power, the savings amount in different cities thus, would be different.
Using above example:
2000 USD pm in USA = 40,000 INR pm in Nagpur = 80,000 INR pm in Delhi.

By the same token, if expenses in Nagpur are 50k INR per month, then the expenses in Delhi per month would be 100k INR pm to maintain a similar lifestyle.

Lets calculate the equivalent salaries for a savings of 2000 USD p.m. in USA:
Nagpur: (40k + 50k ) * 12 / 0.75 = 14,40,000 INR p.a.
Delhi : ( 80k + 100k ) * 12/ 0.75 = 28,80,000 INR p.a.

Hope I am able to make my case.

[old_city_fella]

In fact, I am now thinking, monthly spending i.e. 1500USD (if that is your monthly expense in US) should be comparable to 50000INR (if that is your monthly expense in India). Further, PPP should be derived from this instead of the other way round. So, in a way, one can have his own customized PPP.

Somehow, I missed your point earlier. Creating his own customised PPP - is brilliant!!
Assess the expenses expected in the city you are moving to.
then compare the current expenses in USA.
Compensate for the differences in lifestyle.
calculate the Purchasing power for that City for your lifestyle for your family.

then work on the savings equivalent and calculate the salary equivalent.

[dhanu]

Thx!

Compensate for the differences in lifestyle.

I am not sure if it is useful to do that. I think difference in lifestyle is what causes the PPP in the first place. If you compensate for lifestyle differences, PPP will be 1:Exchange Rate.
Here is what I am thinking (I don't know if this is correct line of thought or not): 1 lit of Milk in India is not same as 1 lit of Milk in US because there are several non-directly measurable parameters such a guaranteed quality, homogeneity, personal service, freshness etc. And that's why price of Milk in US in USD cannot be directly converted to price of milk in India in INR. But once you compensate for all these things, both the prices will be exactly same but (in different Units i.e. USD and INR, of course).

In other words, if you say one can buy more for 1 USD (i.e. 50 rs) in India than in US, I think, in absolute terms, it is not correct. You think you are getting more because you are not counting everything that 1USD in US buys.

[oasis138]

Hope this article helps -

FEBRUARY 20, 2010
Implied PPP and Big Mac Exchange Rates for Brazil, India, Russia, and China
Goldman Sachs has predicted that Brazil, Russia, India and China (BRIC's) are the countries with the most promising economic growth prospects The BRICs also performed the best during the latest financial crisis.

China has been singled out by economists and the US government as having an undervalued currency. An implication is that over the years as the currency exchange rates approach fair value then the economies with undervalued currencies will be larger with future exchange rates.

The Big Mac index approximates PPP (Purchasing Power Parity), but does not measure India because of the lack of beef consumption.

By PPP measures China, Russia and India should have a lot of currency appreciation over the next few years for China, Brazil and Russia and a bit longer for India. (India is at an earlier development stage and will take longer to get currency appreciation) Brazil will have a little less from PPP but with increasing oil production will have a boost from the strength in the value of commodities (Russia gets a similar boost from commodity prices).

China Yuan Implied exchange rate 3.5 yuan to 1 USD (48% undervalued)
Russia Ruble Implied Exchange rate 18.8 rubles to 1 USD (37% undervalued)
India has an implied 16.164 (65% undervalued)
Brazil has an implied 1.51 (20% undervalued)

China should have double its current economy when exchange rates are fair value. Russia's economy should be 60% larger. India's economy should be nearly triple and Brazil's economy should be 20-25% larger.

The Implied PPP Conversion Rate for India is 16.165

GDP Per Capita (Current Prices, National Currency) INR 47,402.87 .
GDP Per Capita (Current Prices, US Dollars) US$ 1,032.71
Output Gap, Percent of Potential GDP -
GDP (PPP), US Dollars US$ 3,528.61 Billion
GDP Per Capita (PPP), US Dollars US$ 2,932.49
GDP Share of World Total (PPP) 4.946 %

The current US dollar to Indian Rupee exchange rate is 46 rupee to one dollar