Many of us convert the salary received by Indians going abroad in local currency (USD, Euro etc.) into INR and assume that “they” are doing much better than us. This is, however, incorrect.
The exchange rate does not help us compare the cost of living in the two countries. That is, it does not help us appreciate how much more expensive the same lifestyle is when someone shifts from India to, say, the United States.
The purchasing power parity measures this. It is the ratio of the price of goods in two different locations. Naturally, this can never be exact, but it reasonably compares costs for a similar lifestyle.
The World Bank offers PPP data normalised to the US with the following definition.
Purchasing power parity (PPP) conversion factor is a spatial price deflator and currency converter that controls for price level differences between countries, thereby allowing volume comparisons of gross domestic product (GDP) and its expenditure components. This conversion factor is for GDP.
Naturally, this data may not adequately represent the PPP for everyday expenses in two countries, but we can get a reasonable idea.
As of 2021, the purchasing power parity between India and the USA is 23.22 (data source: World Bank, linked above).
How do we interpret this? Consider a person earning 5000 USD a month after tax. If we use the current exchange rate, this is about Rs. 4,07,855. If we use PPP, 5000x 23.22 = Rs. 1,16,100.
So this means we only require a salary of 1,16,100 INR to have the same lifestyle as someone with a salary of 5000 USD in the US. Of course, the lifestyle here does not include any extravagance. Even if it is inaccurate, we can appreciate that the US is way more expensive than India.
We can also interpret this differently. If the US and Indian residents were given 5000 USD to spend, the Indian (again assuming no extravagance) would have a lot more left in hand at the end of each month.
This is why it is incorrect to assume every Indian living abroad is better off than us residents. They have their problems to tackle, and each has sacrificed much.
Yes, if they have some investible surplus in local currency and come back to India for good, the exchange rate would make the corpus sizeable. But this is not the case for all, and certainly not the case if they stay there.
We tend to assume everything is better abroad and everything bad here in India. With a reasonable salary, it is possible to live well here as long as our wealth grows faster than our wants.
The purchasing power parity is hardly an accurate representation of differences in expenses for similar lifestyles between two countries. Still, it gives us an estimate and reminds us that the grass isn’t always greener on the other side.
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Dr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over nine years of experience publishing news analysis, research and financial product development. Connect with him via Twitter or Linkedin, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free investment advice.
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