The first thing i think, whenever there is an increase in inflation is my money in Bank account. The value of money in Bank account reduce by the amount of inflation. Say I have Rs 10000 in bank and the inflation is 10% then at the end of year i would have just Rs9000, meaning the Rs10000 in the bank account would be worth Rs9000. Say if the bank gives 5% interest rate i would still loose Rs500 at the end of the year. Hence inflation is an important factor to be watched at. The RBI (Reserve bank of India) target is to maintain 5% inflation and currently its significatly higer to 7.3%.
How can government handle Inflation: Based on my knowledge in the financial industry i understand few strategies which exists to control inflation. There are 2 catogrioes of economists who speak about inflation
1) Monetarists 2) Keynesians
Monetarists suggest to increase interest rates to control inflation and Keynesians suggest to change the fiscal policay to control inflation. Some operate on something on "Open Market Operation" (wiki it - good one)
To list down, i think the following can be done to control inflation:
1) Increase in Interest rate (As India is not a Debt economy it might not work, but trying it can help)
2) Increase in CRR (Credit reserve ration). This is the amount the Banks should posses.
3) Change in Taxations like the one did before cutting Import duty, banned export to increase in domestic supply and reducing the prices of products.
4) Providing benefits in form of tax cuts to manuafacture of basic materials like Steel, cement, farmers producing necessary crops. This may be in form interest free loans to such industrialists.
Few of my office mates have ideas based of Forex and Currency appreciation which i do not understand - Explain if anyone understands.
Each one of the above has its own advantages and disavantages. Our country is in the prcoess of trying all of these to curb inflation issue. The next one is (hopefully) the Interest rate hike on Tuesday.
Any comments, would be helpful.
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2 comments:
ASHOK's Comment:
As far as inflation goes, the point 4 that you have mentioned will not help b'coz increasing credit supply (thro interest free loans) to the industrialists will actually increase inflation (multiplier effect...). Tax cuts will have, but not in short term.
The basic thing abt controlling inflation is REDUCING MONEY SUPPLY into the economy. The question has to be at what cost? Mainly, it is at the cost of growth.
Banning exports of food items or reducing import tariff for certain foods (whose prices have risen heavily) is a good short term tactic (thou politicians beg to differ).
My Reply:
I get your point on multiplier effect pushing inflation up, yes i understand in short term it might sound harmful but if the inflation is because of shortage of food supply then this step will help in long term. Is might point ok/clear?
You mentioned about REDUCING MONEY SUPPLY to the economy, i think the current reason for inflation around the world is not because of surplus availability of money, i thinks its because of LESS AVAILABILITY OF SUPPLIES, i validate this by comparing the 6 different types of oil produce around the world and Rice and wheat crops, the actual production has decresed, hence i think the current inflation is dure to REDUCTION IN SUPPLIES. Does this convince you ?
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