Inflation has always been one
of the key concerns of every nation and India is no exception to it. We keep on
hearing the loud voices of the market force getting strong as soon the RBI
prepares itself to announce its quarterly monetary policy or in case our
Government announces some fiscal measures to deal with the Inflation-Growth
problem.
In India, inflation is based on WPI (Wholesale price Index) which is a basket of 676 items. In November 2012, inflation based on WPI stood at 7.24% (still in the trotting zone). However, some economists believe that CPI (Consumer Price Index) is a better method to determine inflation because of their differences in the weights of essential items. This is because inflation directly hurts the poor people and CPI data shows the increase in price of "primary items" like food and fuel separately. On the other way, WPI carries very less weight of primary goods (only 20%). The food inflation stands at around 9.5% which is still in the uncomfortable zone for the Aam Aadmi.
Before coming to the measures taken to curb inflation, let us first discuss the main causes of inflation. Inflation is caused by increase in demand of essential goods and services. There is a famous saying: “Too Much Money Chasing Too Few Goods”- this is the case with demand-pull inflation. Other type of inflation is due to structural deficiency in the economy which is unable to respond to people’s increased demand for food. It also includes the inefficient distribution system. Cartelisation, Hoarding are other economic issues leading to man-made inflation.I believe the solution is based on the collective effort of Fiscal, Monetary and Administrative measures. The “Fiscal Measures” is based on the government policies. Government of India at first should try to reduce the “indirect tax” as it directly hurts the lower income groups. However, to compensate for this, government must increase the “Tax Base”. At present, it is only a mere 2.5% tax payers in the country. Tax evasion is highly prominent in our country. Very recently, America adopted a policy whereby the super-rich will have to pay higher tax. I subscribe to this view and it can be adopted by India. Even some economists including the PMEAC chairman C Rangarajan suggested the incumbent Finance Minister Mr. P Chidambaram to follow the same route. The other area for the government to manage efficiently is the “Expenditure” of the revenue generated. India has been facing high fiscal deficit of around 5.9% in 2012. This inefficient expenditure increases liquidity in the market. However, the sad part of the story is that these expenditure in most of the times fails to create Asset for the country. For eg. We are spending crores in MGNREGA without creating any asset. The government must understand that these are not sustainable in the long run and also leads to inflationary pressure. It is equally true that expenditure is important for carrying out the social work for the needy, but we should focus on skill development so that dependency on the government is reduced and hence the unnecessary expenditure. One of the most crucial areas requiring prompt attention of the government is that of “Infrastructure”. Infrastructure includes roads, storage facility etc. Lack of infrastructure leads to higher transportation cost and hence increases prices of essential commodities. Also, we are facing serious shortage of good storage facilities resulting in demand-supply imbalance. The government should also look upon with a hawk-eye that there is no cartelization. It is not for a single time or so we had observed cartelization by the companies. Not many days ago CCI (Competition Commission of India) had imposed fine on eleven cement firms, DLF etc. These are of the nature of self-created inflation.
The Reserve Bank of India is always under pressure especially from the corporate to reduce the CRR (Cash Reserve Ratio), Bank rate etc. These come under the monetary policy. It is very much necessary for the RBI to keep the policy rates balanced and not fall to the external pressure to keep inflation under control. It is also the responsibility of the Administrators to keep vigilance regarding hoarding. The 2010 onion price surge was an example of hoarding.
In conclusion, the government should keep in mind that inflation creates a negative sentiment among the masses and must make suitable policies to keep inflation on check.
