Wednesday, June 4, 2008

Coping with this ongoing inflation and a food/oil crisis

Only recently has the Congress led-UPA Government hiked the prices of essentials like petrol and diesel by Rs. 5 and Rs. 3 respectively. This, in turn, is likely to have a 'not-so-negative' impact on the overall economy. Whereas Inflation has now touched 8% level, the growth level has been sustained at around 7-8% too! Striking a right balance between growth and price control(curbing inflation) has always been a big challenge and so will it be this time around.

With prices skyrocketing, Indian middle class' savings and purchasing power will reduce considerably: prices of LPG have risen by Rs. 50 a cylinder . Now not only food costs more, but cooking food will grow dearer too.

RBI's balancing act of growth momentum and inflation by revising CRR(Cash Reserve Ratio) to 8.25% from 8% would work to suck out liquidity from the market and curb inflation to some extent. Kudos to YV Reddy for that, but the petroleum minister Murli Deora has increased petrol prices, making it dearer for commuters to travel by any kind of transport(barring cycles). Now we'll simply have to bear the brunt of the oil crisis in India alongwith the never-ending price rise of vegetables and fruits.

The economics of inflation as told by monetarists

Many monetarists may believe what Nobel Laurette Milton Friedman said : "Inflation is always a monetary phenomenon." He means that money determines the overall price level of an economy. Here's how: If you spend more money buying oil, there is less money to buy food items. So, after a few days, the price of food items should decrease in tandem with the demand for it. Most monetarists conclude that inflation arises when money supply expands more than the output. Therefore, the solution lies in not short-term policies relating to money, eg. CRR, petrol hike, but long-term plans and an equally efficient agriculture as well as transport infrastructure.

All suggestions and critics are welcome at our comments page.

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