“Inflation is as violent as a mugger, as frightening as an armed robber and as deadly as a hit man”.
-Ronald Reagan.
From pins to ships; from retail customer to wholesale importer; the buzz word today is 'Inflation'. The year 2008 has taught us many costly, un-timely lessons that have hindered our growth and have given us a chance to rethink our belief; the most valuable of those lessons is ‘inflation’. It rose to 13% in 2008, setting a record ever since independence. The world's inflation was at 2.2 m% in 2008. Zimbabwe was one of the countries most worsely hit by inflation. Its high inflation rate of 13 m% persuaded it to mint a 100 billion dollar note to check national bankruptcy. This instance is one of the most unthinkable ways the world had sought refuge under to escape inflation.
India’s 2009-10 Economic Survey Report informs a high double-digit increase in food inflation, with signs of inflation spreading to various other sectors as well. The food inflation, which was at 12.47% last month remained above the 16% level for most part of the last year. The fall was mainly due to drop in prices of vegetables, especially potatoes and onions. The primary articles index and fuel prices index, however, witnessed an increasing trend at 14.5 percent and 14.29 percent respectively. The fuel prices including petrol, diesel, kerosene and cooking gas were raised in the last June.Wholesale price inflation, the measure for overall increase in prices, was at 10.55 percent in June.
The 'Quantity theory of money' describes inflation as: 'too much of money chasing too few goods'.As per Keynesian concept, it is 'Excess of demand for goods and services over their available supply'.If described more precisely, it would be: 'Gradual, unchecked and sustained rise in price level for a prolonged period of time, which generates expectations of a further rise'.
The following methodologies may be adopted to reduce the inflation rate and also to handle greater challenges.
Today, the primary tool for controlling inflation is 'monetary policy'. A low positive inflation is usually targeted, as deflationary conditions are seen as dangerous for the health of the economy. In Indian scenario, the Prime Minister has promised a low inflation rate of 6% by this December. High interest rates and slow growth of the money supply are the traditional ways sought after by RBI to fight inflation. Monetarists emphasize keeping the 'growth rate of money' steady to control inflation (increasing interest rates, slowing the rise in the money supply).
'Inflation targeting' can be defined as a 'framework for policy decisions in which, the central bank makes an explicit commitment to conduct policy to meet a publicly announced numerical inflation target within a particular time frame'. The target can be a point or a band. RBI is already studying world's successful models for inflation targeting and is planning to implement an 'Indianised solution' in the battle against inflation.
'Core-Inflation' concept takes only the rate of inflation that is not affected by external factors. The rate of inflation that is caused due to other factors beyond the control of the Government such as 'petroleum price hike' and 'global climate change' are ignored. When monitored effectively, the domains of mismanagement can be identified and necessary remedy shall be applied.
Increase in exports causes shortage of supply in domestic market. As exports provide more income for producer and more ‘forex’ for the nation, its increase will be naturally continued, starving the domestic market. The Govt. of India has already taken steps viz- not allowing export of 'non-basmati rice' and wheat. This has resulted in reduction of food inflation. The same methodology can be applied for various other commodities too.
'Administered prices', the prices fixed arbitrarily for certain commodities like food, petrol, metals, etc. by the Govt. tend to have a great impact on common man's budget and hence; if increased even slightly, would cause havoc.The Govt. has reacted in this issue by non-revival of issue prices of essential commodities like wheat and rice. It has also enforced new orders under 'Essential Commodities Act, 1955' which empowers the State Governments to release hoarded stock for distribution and to invoke stock limits in respect of wheat and pulses for 6 months.
The Government should create special programmes that educate the people on how, when and where to invest their capital in times of inflation. Such programmes should also familiarise pepople to the various means the Govt. has undertaken to curtail inflation.
Introduction of special management education focussed on inflation is also welcomeable.
Currently, two methods are employed to measure inflation rate viz- WPI(Wholesale Price Index) and CPI(Consumer Price Index). WPI is calculated every week using the price values of 435 essential commodities that have a heavy weightage on common man's life. CPI is calculated using the retail/consumer prices of essential commodities.PPI (Producer Price Index) measures the price change form a producer's perspective unlike CPI which measures the price change from a customer's perspective. The major advantage of using PPI is that: here only basic prices are used, taxes & trade margins are excluded. Hence, price changes at crude and intermediate stages can be identified before the product goes into final stage. Moreover, it is an accurate measurer of inflation.
WPI is calculated only for commodities. The 'Services' sector accounts for about 55% of our GDP and hence, there is need to develop service price indices for selected service sectors (roads, railways, port, banking, telecommunications, post, insurance, etc.) particularly in the national accounts framework. SPI (Service Price Index) creation would ensure a controlled growth in these sectors, which have considerably grown through the years 1950-2009. This move is spearheaded by the Ministry of Commerce and Industry.
'Flexibility in savings' normally means money isn't tied up for long periods of time. The national savings may be in such a way that they provide reasonable interest; yet, at the same time, should be liquid enough to use at emergency. Investments made must return maximum profit in a minimum period. Infrastructure and HealthCare are two areas that match these criteria. If a portion of our capital is spent on these areas, they would be much fruitful.
Crude oil is the raw material for fertilisers and fuel. Hence, it's price & availability have a direct impact on agricultural produce, transport & industry. When its price increases, people go for alternatives of crude-oil like methanol(from Sugarcane) and rinseed oil. This urge causes the price of these alternative commodities to increase as well. Thus, virtually it controls the production cost of all other materials.India already has enough oil fields to meet 60% of it's demand. The rest of 40% can be achieved using alternate energy means such as solar and wind energy. Indian Govt. is already taking steps like construction of a solar power-plant in Rajasthan and expansion of the 'Kayathar' wind energy station in Tamil Nadu to effectively harness these sources.
A fixed exchange rate (pegged exchange rate) is a type of exchange rate regime wherein a currency's value is matched to the value of another single currency or to an another measure of value, such as gold. It can be used to stabilise the value of our 'rupee'.
Rapid urbanisation and high economic growth experienced by ther urban countries in the last few years has resulted in the upsurge in property values.The importance of facillitating supply of affordable housing to the people and the necessity of designing a right mix of policy initiatives to encourgae house accquistion highlight the necessity of tracking the movement of residential house prices. The National Housing Bank had earlier set up a Technical Advisory Group (TAG) to explore the possibility of constructing a real estate price index. 'NHB RESIDEX' has been launched in 2007 as the first housing price index in the country which aims to track price movements in residential properties in selected cities over time.
For 2009, inflation rate in India stood at 11.49% Y-o-Y. This rate reflects the general increase in prices, taking into fact the purchasing power of the common man. According to the Economic Survey Report for 2009-10, economic growth decelerated to 6.7% in 2008-09, from 9% in 2007-08. The economy is expected to grow by 8.7% in 2010-11, with a return to a growth rate of 9% in 2011-12.
“Inflation is like sin; every government denounces it and every government practices it”
- Frederick Reith Ross.
The above lines clearly depict the nature of inflation. India is already in the right path towards deflation. If certain measures like creation of inflation-awareness and eradication of inflation-fear are taken, we would even pioneer western giants in this journey. To avoid global degradation, every country must learn to co-operate and correlate. Co-operation brings us benefit and allows us escape from a global bankruptcy. Correlation allows us to better equip ourselves in the battle for universal sovereignty.
