Tuesday, July 27, 2010

Inflation and its Impacts on public


Inflation is always and everywhere a monetary phenomenon” rightly said by Milton Friedmen who won Nobel prize in economics in 1976. we can say inflation is too much of money chasing too few goods. Our country is facing very high inflation for the past couple of months. What do you think that may be the reason for this increasing inflation? Let us discuss the reasons and effects.

The two key measures of inflation in India are Wholesale Price Index (WPI) and Consumer Price Index (CPI).

Wholesale Price Index (WPI)

WPI is the headline measure of inflation doest not represent inflation faced by consumer rather it covers the price scenario in raw material, intermediate products, and final goods in wholesale markets. Service sector which contributes 55% of economy is excluded from WPI further items like house rent and helath care are missed out. WPI gives little importance to food items which is critical for common man's consumption.

Consumer Price Index (CPI)

CPI covers a broader spectrum of goods and services and the higher the CPI the higher will be the cost of living and it is a better indicator of consumer burden.

Currently both CPI & WPI are at 13.9% and 10.6% respectively. Surge in prices is directly proportional to persistant failure of agriculture(due to bad monsoons).

The population has been rising gradually but there has been near stagnation in the production of pulses and that results in reduced availability of food grains per person. In 2009, rains were 23% below normal as a result food prices gone up and this increase is not only because of production shortfall but also because of speculation and hoarding. It is also argued that the income transfers to rural people via the NREGA have created additional demand for food.


Inflation with this figure rising every month even every week people are cutting down expenses and eating less and less healthy food. Most of BPL people are taking even more less than the acceptable calorie level per day which further results in increasing hunger deaths. Restaurants are also started to reducing portions and diluting curries and increasing prices. Most of the parents cut down their outings with their children and their entertainment. As the vegetable prices go up average homes cannot able to spend more for buying vegetables.

Control Measures to be taken

In a bad agricultural year, the policy should focus on sharing up supply through imports and release of food grains from stock and curbing speculation and providing safety net to the poor.

The States should forgo revenues to neutralise some  price increase by reducing the taxes on food items which adds an additional cost at the retail level.

One way to rein in the amount of money coursing through the economy is to raise the interest rates , which could encourage folks to put their money in banks rather than keep it in circulation.

Government should reduce the taxes it levies on oil in order to absorb part of the under recovery and should focus on alternate sustainable fuel technology such as biofuel.

Ulike potatoes and tomatoes , most other vegetables rot quickly so it is better to get them to market before they go bad , to get around this problem is to build better roads and transport facilities for farmers to bring their produce to market from hinterland.

Government should commit buying cereals directly from farmers to reduce the benefits garnered by middle men which suppose to be garnered by farmers himself and should increase the subsidies for food grains and reduce administered prices of grains.

There is some evidence that faster growth is leading to high inflation in manufactured products so RBI should refrain from raising interest rates so long as food inflation was key driver for overall inflation.

What the government is doing so far

RBI has started raising the interest rates and will continue to do so gradually to tame Inflation.

Government had succeded in providing the safety net by curbing speculation and hoarding but was lax about import & release of stocks. Also government recently hiked its support price for cereals and dal.

Eventhough government is doing many inflation curbing activities unless and untill it provides more subsidies for food grains , reduce the taxes on oil products , increase import of food grains and release of stocks immediately there wont be a huge dip in inflation rates.

1 comment:

  1. Good One and Insightful post Prakash. Looking forward for many such informational posts . Thanks .