8/7/2019 Double Digit Inflation can it be brought under control

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DOUBLE DIGIT INFLATION: CAN IT BE

CONTAINED

Over the last few days, the citizens of India have been reeling under heavy

inflation. Inflation, especially in the prices of basic food articles which are desperately

needed by the poor of the poor of Indian society is the most serious issue that a country

like India can face. This is mainly because India is primarily a nation of poor people.

Yes, there might be quite a few rich people but their numbers pale in comparison with thenumber of poor people. For these poor people, nothing matters more to them than food,

water and shelter and it is the duty of the Government to somehow make at least these

basic necessities available to all the people. However, when something like inflation

happens, it affects them unimaginably. For these people who only need the basic

necessities of life, even this simple need of theirs is then denied. So inflation should

always be in control. However, this time in which we presently live is not one of those

times. Inflation is ripping things and more importantly, people apart and this must be

stopped as soon as possible.

Now what is inflation? An economics textbook will define inflation as a rise in

the general level of prices of goods and services in an economy over a period of time.

That may be the definition, but ask any poor person what it means to him and he will tell

that it means, to him, a lot more than what the above dry words expressed. It means

hunger, it means overtime work, it may even mean death. “Domestic inflation reflects

domestic monetary policy” said Martin Feldstein, currently the George F. Baker  

Professor of Economics at Harvard University, and the president emeritus of the National 

Bureau of Economic Research in the United States of America. Well he would, and

should know. So it seems that the Government is in charge of containing inflation.

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However, sometimes, as in this case, the whole thing goes out of hand. This time around,

the main cause of the inflation was the high rate of food inflation.

For 2009, Indian inflation stood at 11.49%. The Indian method for calculating

inflation, the Wholesale Price Index, is different from the rest of world. Each week, the

wholesale price of a set of 435 goods is calculated by the Indian government. Since these

are wholesale prices, the actual prices paid by consumers are far higher. In times of rising

inflation, this also means that the cost of living increases are much higher for the

populace. Cooking gas prices, for example, have increased by around 20% in 2008. The

Deputy Chairman of the Planning Commission, Montek Singh Ahluwalia has said

towards the end of July that inflation “will keep declining after July and moderate by

December”.

The RBI has got only one cure for inflation. It is almost like a mantra for it. It is

‘tighten monetary policy by raising interest rates and squeezing liquidity.’ Now one thing

that has perplexed economists everywhere is, how in countries whose economies are

supposed to be ‘overheating’, like China, Indonesia et al., the inflation is so low where as

in India it is so high. A big reason for this is the dependance of India and its farmers, its

‘kisan’, on the monsoon. There has been much talk about decreasing this dependance.

There have been many proposals. The NDA government had brought out a proposal to

connect the rivers of India so that the disturbing spectacle of one part of the country

suffering from floods and another from drought will not be seen again. This proposal

vaporised some time back or so it seems. So it has come to haunt us back, or rather our 

poor back, our farmers back. The weather Gods failed us last year, so India's agricultural

output suffered a sharp drop, and as a consequence supply declined and prices rose.

Another reason is the policies of the Government. Prices of fuel have recently

been increased, which is contributing to overall price inflation. Minimum support prices

for agriculture have also been increasing. Price smoothening by the Government by

higher imports and faster domestic resources usage has not been up to the standard.

However all these reasons are superceded by the proverbial ‘big daddy of them all’. And

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that is, that the supply capacity of the economy is simply unable to match the demands on

that capacity. This means that the economy's current growth rate of 7-8 per cent is above

its potential growth rate. This can have a bad effect in future and attaining double digit

growth will prove to be impossible.

In agriculture, productivity growth is not up to the mark. On the other hand,

purchasing power and hence demand are accelerating. This can prove to be remarkably

difficult to handle. The “Lakshman Rekha” of 5% that politicians dare to cross only

under peril may be very difficult to reach, but may still be possible with aggressive

monetary policies. Thus, the diagnosis of and cures for inflation may need some

rethinking. Inflation may have a lot more to do with services and land as an input. There

have been theories, like one put forward by Arvind Subramanian, a senior fellow jointly

at the Peterson Institute for International Economics and the Center for Global

Development and senior research professor at the Johns Hopkins University that Land

market distortions, capital inflows, and services may help explain India's inflation. He

feels that curing it may require “addressing the macroeconomic aggravators of 

microeconomic distortions”.

Meanwhile as a lot of debate is going on, consumer prices in India are rising at

least twice as fast compared with inflation rates in Brazil, Russia and China, the other 

three nations that make up the BRIC economies. RBI Governor Duvvuri Subbarao is now

under pressure to raise interest rates. “Inflation is an urgent issue and we don’t have a

package as yet which can give us confidence,” feels Bimal Jalan, who headed the Reserve

Bank of India from 1997 to 2003. The government must do something in order to

somehow bring this under control. Paul Krugman, the Nobel Prize winning economist

feels that the high unemployment rates in the USA may become a common thing as

politicians there may start feeling that high unemployment is normal for a country. He

feels that the main thing to be erased is this mindset of the government. Our Government

must also take his advice and make sure that it does not take the high inflation as normal.

That is the main thing. Well, it is unlikely that the opposition will let the Government to

forget it. So, we see that it is not whether the rate of inflation will come down, rather,

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how quickly the rae of inflation will come down from double digits. And as anyone can

say, the quicker, the better.

So political will is a necessity. We should stop squabbling and look forward to

controlling inflation. It is believed that inflation cannot be brought to something like 1%

or near, but an inflation rate of 5% will be all right according to most sources. A deflation

too will not be good or feasible. Our legislators and economists who control India have to

realise that they hold the future of India in their hands and that they will have to take

solid, tenable and most importantly quick steps in order to reduce inflation, and thus

lighten the burden of the people of India. For it is of utmost importance that the poor of 

India, its very soul, are saved from the Atlas-like load that they presently hold.

PRATHEEK PRAVEEN KUMAR 

  prytheek@yahoo.com

 

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