Sunday, September 5, 2010


The inflation is the greatest worry of the country now. We are though sure that inflation is bound to come down by year end yet it would require both monetary measures as well as fiscal and administrative measures on regular basis. The food inflation has again soared up during the second week of August. This has naturally upset government of India. At present the food inflation index is hovering around 10.7% to 12%. The higher inflation has embarrassed the ruling party as the opposition has been pointing out the failure to contain the inflation. But good news is that GDP growth reflected a very health picture, after 2008. But such an up charge in GDP figure is almost unbelievable. A thorough check up on demand side contribution could be reworked for reassurance of the genuine GDP figure.

In mainstream economics, the word “inflation” refers to a general rise in prices measured against a standard level of purchasing power. Previously the term was used to refer to an increase in the money supply, which is now referred to as expansionary monetary policy or monetary inflation. Inflation is measured by comparing two sets of goods at two points in time, and computing the increase in cost not reflected by an increase in quality. There are, therefore, many measures of inflation depending on the specific circumstances. The question of high inflation rate or low inflation rate is not be the actual point for our country. The actual point should be whether the rate of inflation is stable or not. In most developed country the price of food product are much higher compared to our country. When a kilogram of potato cost Rs.six in India, in USA it is $ 3 a pound meaning Rs 300 a KG. But the rate of price of food staff does not fluctuate as much as in India because the rate of inflation remains steady. The earning of people should match with the level of inflation. So when in India the bank deposit rate provides 8% to 9% interest but inflation rate remains at 4% to 5% then the level of sufferance of people go down. So what is more important is stability of inflation rate and enough purchasing power. In developing economy when the country develops to the next stage of growth it is bound to create inflation and that should be welcomed. When India reach the stage of quasi full employment situation due to higher growth the price line will increase but rate of inflation would stablise. People’s level of sufferance would go down despite high cost of goods and services because earning to inflation rate would remain higher or neutral. So stability of inflation and higher purchasing power should be the aim that cannot be achieved through monetary measures alone. Healthy GDP growth is a must and that would be possible provided agriculture sector contribute substantially. The farm out put is stabilizing and by December this year the3 country would see a robust growth in agriculture sector too.

Reserve Bank of India Governor D. Subbarao rightly said,” there is a need for policy action to manage inflation as demand-side pressures are building up.
Monetary policy of course is a right line of defense, it is our duty, our karma, to manage inflation and we have been doing so in the last few months," Subbarao said after delivering the C.D. Deshmukh memorial lecture.
India's headline inflation accelerated to 10.6% in June after moderating to 10.2% in May, data compiled by Ticker News Service showed. RBI hiked repo rate, or the rate at which it lends short-term funds to banks, by 25 basis points on Jul 27.Earlier too, it had hike repo rate by 25 bps on Jul 2.
According to us the action taken by RBI during second part of July was not enough .The Central Bank should have taken drastic measures in hiking repo rate further.
"Controlling inflation is a challenge for monetary policy although it is driven by supply-side factors. We can't sit in air-conditioned offices saying that this (inflation) is a supply-side factor," Subba Rao stated. The concern of Governor is appreciated but according to us he should have been able to deal with the issue with much more convincing aggression..
If inflation levels do not come down in the next four weeks, the Reserve Bank of India (RBI) may go for a rate hike in its September quarterly review of the monetary policy, hinted Prime Minister’s Economic Advisory Council (PMEAC) Chairman C. Rangarajan here on Saturday. But we feel RBI would now not be required to move up the repo rate any more. During Mid August inflation had gone up again to 10.75% According to our projections the result of a good monsoon will show up only in September . Except Assam the Eastern India has been deficient of monsoon by 30 %. With good showers in September the agriculture output will go up between 4 and 5 per cent this year and it will have a favourable affect on the availability of food grains. This would bring down the inflationary pressure. It is not only RBI but Government of India shall have to also take effective steps to make food grains available. The strengthening of public distribution system is also required. The most important requirements would be elimination of middlemen. The inflation cannot be controlled by RBI alone .Supply side must be improved and middle men must be tackled. This is not the duty of RBI but that of Government. The food inflation n Assam would have gone down if state Government would have controlled middlemen The prices of vegetable and Fish in Bengal have come down by 25% but have not stablised in Assam.. This is because government has not been able to take effective steps though RBI has taken proper monetary measures. However on the Last day of August the GDP growth was touching almost the target figure of 9%.
This seems to be a good news for the country. Planning commission’s Deputy chairman was not much concerned on show of decline in growth during July. He felt that a lot of individual components of economy are showing good growth. It would improve by the end of the fiscal. We wish him all the luck We feel with good monsoon the inflation would come down by the new year of 2011 only provided Government take effective administrative steps on demand side and RBI take aggressive monetary control in September.

1 comment:

Financial Planning said...

The Indian economy expanded at 8.8% in Q1 (April 2010 to June 2010) of FY 2010-11 , thereby inching-up from 8.6% growth posted in the previous quarter (January 2010 to March 2010). The Gross Domestic Product (GDP) (for Q1 of FY 2010-11) at the constant prices of 2004-05 is estimated at Rs 11,32,778 crore, as against Rs. 10,40,949 crore in Q1 of 2009-10.

Yes increasing inflation is a reason to be worry, but i guess, growth of GDP is a good sign.