Inflation: The High and Low of it.

Shruti Jain

“Inflation”, no other economic theme could be more justifiably denoted to the year 2011-12. The mainstream economics defines the word “inflation” as a general rise in prices measured against a standard level of purchasing power.

 

Two different worlds are having two different trends but one single problem: Inflation. It is learnt that people’s perception about global economic scenario hasn’t changed much. Developed economies are still careworn with sustainable job environment deficit, when emerging global powers are marred with high price rise and high interest rates. While the advanced economies have been struggling to create growth and jobs and fight deflation, the new world economies are struggling with the negative spin-off effects of rapid growth and strong domestic demand, and are fighting rising inflation.

Indian Economy and Inflation

Hide and seek is the name of the game when it comes to inflation in India in the past two years. In India, inflation has become smart political excuse for higher growth, which neither seems high nor steady. Certainly, we can’t argue against the fact that global issues have made their contribution to add to the inflationary woes, Indian economy has been facing, however, sudden outbreak of scams, fresh highs of corruption level and lack of policy reforms from the government have caused inexplicable consequences on Indian growth mechanism as well as on the budget of an individual.

 

When India touched double digit growth, Indian enthusiasts started writing China off, comparing it to Indian growth and started painting stories of India over taking China by 2020. But reality has a different picture to portray. India has high inflation rate of around 9 per cent and consumer price Index (CPI) is currently flashing at more than 10 per cent. Prices of onions, vegetables and other staples are rising even faster. The latest data of the government food price index shows they jumped almost 17% last financial year. Situation on dining table has changed; food is eating people in India instead of people eating food. Moreover, consistent rise in government borrowings and high purchasing power have added fuel to the fire.



Indian Inflation Factors

Notwithstanding high growth of 8 %, recent analytical opinions suggest that India is heading towards a difficult time. Two political excuses are making most of the knock into the pocket of common men. For a longer period of time Finance Ministry remained hopeful of controlling high price rise within six months (Pranab Mukherjee never pronounced which six months he is referring to). Indian government suddenly woke up to the 16-18% price rise with an excuse that “Inflation remains moderately high in growing economy”. When that argument was countered by economists on technical grounds, government came with another excuse of global price rise and burning crude oil prices. Well! That is quite a valid excuse but not enough to erase policy level deficiencies.

Economy pundits blame India for its high food price cutting into budget of people. It’s not possible for any nation to de-hyphenate its economy from political events. Political developments are enough to equate the real interest rate either high or low. Inflation, interest rates, fiscal deficit, current account deficit and depreciation of local currency could be the reason for slowing down the economic growth. RBI is worried about these things, which have virtually hampered the dream level of economic growth. Loose budgets over a period of years, easy money availability with uninspiring approach towards much-needed deregulations and investments have created a tailback that generated inefficiencies and push up prices.

 

Macro-Economic factors

Nope, it doesn’t mean that as an economy India is giving any negative vision to its people. In the famous words of ex-Finance Minister, P. Chidambaram, “Our fundamentals are strong”. Yes, they do and won’t let India break down. But we are aware of what significance political assurances hold in real economic crisis. There are strong macro economical fault lines that need to be observed closely. Rise in government spending and widening of fiscal deficit would jeopardize the economic growth.



India’s public debt zoomed to more than 76 per cent of the total GDP, which is much higher than ever expected. It has increased with the speed of more than 10% since 2007. Another concern is capital deficit. Current account deficit is expected to inflate further supported by depreciation of Indian Rupee (due to high inflation and interest rates). India’s largest import product is crude, which is major factor when it comes to inflation as crude oil prices are the most fluctuation prone and this fluctuation generally takes place on the upper side of the graph only.



Quick Fix

There can’t be any quick fix to long running troubles India has been facing. Government needs to adopt systematic economic reforms in various sectors like Infrastructure, education, health and public distribution system. And since, the inflation this time is caused mainly due to supply side factors, pushed majorly by the agricultural products, government needs to invest more in agriculture and take steps that would increase the productivity of the sector, instead of simply providing subsidies.



Final Words
In more than one way Indian economy is great learning lesson for the world. Growth, if solves some, creates some other problems. There is reason to be hopeful as what is required – strict fiscal policy and tight interest rates – the central bank of India is exactly moving into the same direction. Since last year RBI has increased policy rates by 13 times and now it is ready to compromise short term growth to control this maniac of an inflation for the long term sustainable growth.