How can govt. control inflation?

Tue, 25 May Pre-Open

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Inflation has emerged as one of the biggest problem areas for the current UPA government. And with the same showing no signs of cooling off, the headache for the government continues. Anyways, Prime Minister Dr. Manmohan Singh has pledged to almost halve the inflation rate by December. How his government plans to do that is, well, highly doubtful! The wholesale price based inflation has almost touched double digits. And the consumer price based inflation currently stands at over 16%!

So, what tools does the UPA have to control inflation? One, it can do this through the RBI. That is by controlling money supply in the economy. Lots of money chasing few goods cause rising prices. So, if the RBI is able to control the supply of money, inflation can be brought down. But in the current scenario, when the economic recovery is just taking wings in India, cutting money supply carries huge risks.

The simple logic is that if people and companies do not have sufficient money in their hands, they will buy lesser quantity of goods, services, and equipments and postpone their key expenses. This will reduce the demand for such products and will thus lead to slowdown across several industries.

So, reducing money supply does not seem the right measure to bring inflation under control.

Another way the government can target a lower inflation rate is by keeping its own spending under check. By reducing its fiscal deficit, the government can reduce the flow of 'wasteful' money in the economy, thereby helping in bring down inflation. But this requires political will, which is missing in India. So this factor can also be considered bygone.

Thus, we come to the most important mean by which the government can bring inflation down. And that too on a sustainable basis! This is by way of improving the agricultural scenario within the country so that we do not face scarcity of key food items like grains, fruits, and vegetables. Rise in prices of these commodities has been one of the basic causes of high current inflation in India. As such, if the government can do something on this account, it can credit itself with targeting inflation efficiently.

And if nothing, as mentioned above, can be done, the Indian government can use the tricks that the Chinese have developed so well over the years. Control inflation by – one, publishing incorrect and lower inflation numbers, and two, by adjusting the inflation basket so as to remove those items whose prices are rising the fastest. The choices are several!