Consequences Of Inflation
Increase in Economic Disparities
When prices rise continuously over a long period, inequalities of income and wealth increase. People with fixed incomes such as workers, government employees, teachers, etc. find that inflation results in erosion of their purchasing power. Producers and traders, on the contrary, earn huge profits. This process if not immediately arrested wipes out even the lifetime savings of the people whose money incomes are more or less fixed, and the wealth on the country gets concentrated in the hands of traders and producers.
Hampers Development
The continuous price. rise during the planning period has turned out to be an obstacle to development. This is particularly due to the rigidity of plan outlays. When a plan is finalised and outlay determined, it is generally not revised even if it becomes necessary due to upward movement of prices. This approach invariably leads to the non-completion of projects in the required period.
Changes in Relative Prices
Over the years prices of all the commodities have not increased uniformly. In some years relative prices of agricultural products increased more rapidly than that of manufactured products while in other years it was the other way round. In those years when relative prices of agricultural products rose more rapidly, large farmers derived great benefits. In India, agricultural income is exempted from income tax. Therefore, not even a small fraction of the large income generated in the agricultural sector could be mobilised by the government for development projects in this sector. Thus the prosperity of the rural rich due to inflationary price rise has inflicted sufferings upon the rural poor.
Adverse Effects on the Balance of Payments
Although since World War II, inflation has been a worldwide phenomenon, prices in India have risen more sharply than in most of the other countries. This created two problems in this country from the point of view of the balance of payments. The demand for India’s products declined and Indian importers, finding that foreign goods were cheaper, tried to increase imports. The government, however, introduced various control measures to restrict non-essential imports. Recently the government has adopted the policy of import liberalisation making the task of reducing trade deficit difficult. Inflation is likely to complicate matters further.
Policy Of The Government To Curb Inflation
Monetary Measures
In a growing economy like the one we have in this country, the central bank is not expected to be very rigid about the quantity of money. For about three decades from 1962 to 1991, the RBI had employed both quantitative as well as qualitative measures of credit control. In respect of selective credit control the RBI has relied mainly on three techniques, which are:
Determination of marginal requirements on advances against the security of essential commodities like food grains, sugar, oilseeds, cotton and vegetable oil.
Determination of ceilings on advances and other financial accommodation.
Charging discriminatory interest rates on certain types of advances. These quantitative and qualitative measures under normal circumstances generally prove to be effective. However, in India, all the time in the past inflationary pressure has persisted due to excessive money and credit creation.
Fiscal Policy – Fiscal policy can be effectively employed for checking inflation. First, the government has often attempted to keep its non-development expenditure within reasonable limits. The development expenditure has, however, been allowed to increase rapidly as it assists in expanding the growth potential of the economy. Secondly, various’ tax incentives have been provided to producers in the private sector. These measures are expected to improve the supply position in course of time. Finally, efforts are being made to avoid deficit financing as far as possible.
Steps Against Hoarding & Black Marketing
Hoarding of essential commodities and black marketing of controlled items often result in considerable price rise. Recognising this fact the government in July 1975 decided to undertake various measures against these anti-social activities, which proved to be quite effective. To mitigate this social evil, the supply of essential commodities must be improved. While in the short period it decided to meet the demand for essential commodities by undertaking their imports; as a long-term solution, it emphasised the need for improving the public distribution system (PDS) on the one hand and increasing the production of essential goods on the other.
Public Distribution System (PDS)
Over the years supplies of essential consumer goods have often fallen short of their demand forcing a rapid increase in the general price level. To deal with this situation efficient management of the supplies of essential consumer goods is of crucial importance. Public distribution alone would ensure supplies of essential consumer goods of mass consumption to people at reasonable prices. This system has also been found necessary for operating the dual pricing arrangement in the case of certain essential commodities.
Measures were taken on the Supply Side
To improve the supply position of essential commodities, the government has often allowed their imports. During 1995-96 from this point of view imports of edible oils (except coconut oil), palmolein, sugar and pulses were allowed. Further, the Food Corporation of India continued its open market sale of rice and wheat to check market price. Finally, substantial reductions in excise duties on a number of items in recent years have induced the pace of industrial revival which would raise industrial growth and in turn improve the supply of manufactured goods.
Inflation Targeting
Decision-makers at the government level no longer favour stability as an objective of economic policy. In their opinion, an inflation rate of around 6 per cent should be made the goal of the monetary policy. This approach known as inflation targeting has the backing of the monetary economists and the experts presently associated with the RBI. C. Rangarajan now talks of the optimal level of inflation for India. He argues, “keeping the price and growth objectives in view, the money supply growth should be so modulated that the inflation rate comes down initially to 6 to 7 per cent and eventually to 5 to 6 per cent. That indeed must be the goal of monetary policy.” According to A. Vasudevan, at an inflation rate of about 6 per cent, GDP growth has been found to be optimal in the case of India. Vasudevan thus suggests that an inflation rate of 6 per cent rather than price stability should be the goal of economic policy.
Check out these notes for Poverty.