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 the number 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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