Rama Krishna Vadlamudi, HYDERABAD 10 October 2011
rural incomes, galloping real estate prices, soaring commodity prices,climbing stock prices, maverick monsoons and others.The wealth effect and the wage/income effect seem to haveprompted people to spend an increased portion of their incomes onall sorts of goods and services – resulting in stubborn inflation.Rotting food grains in the government warehouses have not helpedmatters either. Agriculture yields are stagnant for a few decades.However, preening ourselves in this shining glory, we have failed toanticipate such a trend of persistent inflation. This neglect hascreated supply chain bottlenecks and posing problems in reining ininflation. Milton Friedman famously said, “Inflation is always amonetary phenomenon.” The central bank has dutifully raised interestrates by 12 times sticking to its primary dharma of price stability, butto no avail. The governments caught up in their own scandals haveforgotten to act on expenditure control or clearing up bottlenecks.
Rising fiscal deficit:
The biggest culprit seems to be fiscal deficit, which is on theascendant. In the last four years between 2008-09 and 2011-12, thecentral government’s market borrowings – which are raised from thebanks, insurance companies and others – have been rising at analarming rate. The yearly average net market borrowings of thecentral government for the last four years are at Rs 3,42,000 crore,which is 3.8 times the yearly average of Rs 91,000 crore between2004-05 and 2007-08. This does not include borrowing by stategovernments.Inflation is traditionally measured in three ways – wholesale priceindex (WPI), consumer price index (CPI) and GDP deflator. In India,we follow the WPI measure while the advanced economies mostlyfollow CPI measure. Services are not included in India’s WPI.
Stock markets are highly volatile
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