By Anushka Bansal
Let us start by a simple idea about what inflation is. So inflation is the rate at which the general level of prices for goods and services rises, and subsequently, the purchasing power falls. The Indian economy, Asia’s third-largest, faces a difficult situation where growth has slowed to a decade low, but price pressures have remained stubborn. It has one of the highest inflation rates in the world, and the highest in Asia. Weak growth and high inflation also complicated the policy choice for the central bank. Inflation has emerged as a policy headache and has played havoc with household budgets.
Inflation:
• Imposes significant socio- economic costs
• Distorts economic incentives by diverting resources away from productive investment to speculative activities
• Reduces household saving as the consumers try to maintain the real value of their consumption
• If domestic inflation remains persistently higher than those of the trading partners, it affects external competitiveness through appreciation of the real exchange rate
After rising for five consecutive months, India’s headline annual rate of inflation, based on the monthly wholesale price index (WPI), dipped to 6.16 per cent for December 2013 as compared to 7.52 per cent for the previous month and 7.31 per cent during the same month of 2012.
An official statement, quoting provisional data, said that the official WPI for all commodities’ (Base: 2004-05 = 100) for December declined by 1.3 per cent to 179.2 from 181.5 per cent for the previous month. The build-up of inflation rate in the financial year so far was 5.35 per cent as compared to a build-up rate of 4.84 per cent in the corresponding period of the previous year. Gone are the days when carrying a Rs.10 note would be sufficient. With the growing inflation, it is hard to sustain with average incomes, let alone conditions of poverty. Thus, controlling the inflation and promoting economic growth seems to be the need of the hour.
The fiscal policy measures to correct inflation include:
• Increase in government revenue by increase in taxes and non tax revenue
• reduction in government expenditure
The monetary policy measures would include:
• increase in the bank repo rate
• selling of the securities of the commercial banks in the open market
• Increasing the CRR and SLR.
The current CRR is 4% and the SLR is 23%.
The recent monetary and fiscal policies of the government along with policy changes in RBI should work in our favor. Over all, it is very important to curb these kinds of fluctuations in the Indian economy, which occur too frequently. Let’s just hope that the new government will seek to change the current economic scenario and come up with policy reforms best suited for the Indian environment.
