Is an inflation rate of 6 - 8 percent is bad news for
In 1981 we had an inflation rate of 10.4 percent when GDP growth was over six percent. In 1991, inflation was as high as 13.1 when GDP growth was just one percent. Why are the common man and the policy makers worried about inflation?
Let's take an update on the current inflation trends. Inflation has surged to over three-year high of 7.8 per cent in the second week of May, mounting pressure on the Reserve Bank to further tighten money supply in its forthcoming annual credit policy later this month. More alarming is the continued rise in the food prices where the inflation is higher at 6.8%.
The measurement of the price level is a difficult task and, therefore, so is the measurement of the inflation rate. For example, many economists believe that the consumer price index has overstated the rate of inflation in recent decades because improvements in the quality of goods and services are not adequately reflected in the index. An index that held quality constant, according to this view, would show a smaller rate of price increase from year to year, and thus a smaller average rate of inflation.
It is important to recognize that a positive rate of inflation, as measured by a price index, does not mean that all prices have increased by the same proportion. Some prices may rise relative to others. Some might even fall in absolute terms, and yet, on average, inflation is still positive.
In the Indian context what are the factors influencing the rate of inflation? According to what I read in the papers, it should be global rise in the price of commodities, the crude oil prices, our erratic monsoon, RBI's monetary policies, credit and money supply and maybe the statistical base taken for calculation of the inflation rate.
What if there is no inflation? We have observed that when there is overproduction of crops, farmers are forced to sell below production costs. A few years ago when there was overproduction, tomatoes were sold for Rs 1 per kilo which is bad for producers. But in a rising inflation scenario all people suffer, some more than the others.
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However, political parties need to go by public sentiments, which are often against a rising inflation.
Look at the official reactions. Finance Minister P Chidambaram in
At the same time he announced in the Budget that the country is going to have a record output of food grains this year. So where are the bottlenecks really?
It could be the rising oil prices both edible oil and crude oil or some other global trends over which the FM or RBI has no control. So the question why have a tight monetary policy?
In terms of action also the government cannot be blamed -- it has made exports difficult by raising the minimum export prices of essential commodities and imports by reducing duty on edible oils.
T Nanda Kumar, Secretary, Food, Consumer Affairs and Public Distribution said in an interview that supply side bottlenecks for essential commodities are being addressed.
From the technical point of view, inflation now is different from inflation experienced before because of high foreign exchange reserves that put pressure on rupee to appreciate.
These are tough times for the industry and policy makers then. For the industry, productivity gains have to be long enough to compensate the rising rupee and inflation levels that make them uncompetitive, according to an analyst.
History shows that high inflation rates could correct itself over a period of time through a combination of market forces and government regulation. Or perhaps it is god's way of letting people know the value of money.
