Some musings on Inflation... 1. The dumb one. Inflation is price raise. On an extended note, they may try to fool you by moving from Retail to CPI (Consumer Price Inflation) one day. It only suits the statistical figures the Finance ministry present, but you wont notice the change. As simple as planning commission deciding whether poor people are those who earn less than 28 rs a day or 38 rs a day. 2. Its also tied to your growth rate, because the more money available in market, the more money available for businesses to function. You want 1% inflation, you may get 1% growth. You want higher growth, get ready for higher inflation. Now, please do not shoot me for saying this. I am just passing you the message. 3. It means more money and less goods reaching the market. (Demand and Supply theory). So, in short anything that can push more money in the market can cause inflation in the short term. FDI, Infrastructure spending, Stimulus packages, subsidies and even a low interest regime. Stimulus package is how the outgoing UPA Government maintained high growth rates even when major economies were falling. But, the after effect was that even when the stimulus package was withdrawn money continue to cause inflationary pressure in the Economy, causing RBI to control the money inflow via Repo, Reverse-Repo, Cash Reserve Ratio, Statutory Liquidity Ratio or whatever monetary tools available with RBI, which both Subba Rao and Raghuram Rajan did. Which caused the growth to fall and inflation to continue and eventually causing the downfall of the Government in the economists eyes. On the other hand, low interest regime means more loans are available in the market. This helps businesses, but in short also increase the money available in the market. This along with a lot of infrastructure spending have triggered high inflation during the past NDA regime, eventually unseating them. Subsidies, Budget deficit etc means Government is printing more money than they should have. Government having money Printing machines of their own doesnt give them infinite rights to print money (except when you are USA. Because, even when US Government prints huge amounts of money rest of the countries in the world are forced to buy them, to boost their FDI reserves and Stock market indices). But, thats life for you, and lifes never fair to anyone. Ever wondered, why the flat prices were 30 lakhs when you were getting a salary of 10 lakhs, and by the time you start earning 20 lakhs the flat you wanted to buy is already sold at 60 Lakhs, that is the reason for you. FDI and Infrastructure spending also means the same thing. Whether you print them yourselves or you borrow, eventually you end up pumping more money into the market. On the other side, not having them at all will again mean disastrous. So, this all boils down to the rate at which you want to grow, . Just because your Doctor has told you that you have high cholesterol you dont start running 5 km everyday starting the very next day, right? You want to give it some time, and gradually increase the distance from 500 m to 5 km, or else you will do more damage to your heart than what your cholesterol can potentially do. In short, if money is the heart of your Economy, then inflation is the rate at which it beats. That pretty much sums it up overall. 4. What can go wrong with high inflation though is when the countrys growth is not equitable. Just imagine 2 persons come to the market, one with 1 Rs and other with 100 Rs, obviously the guy with 100 Rs fixes the price of goods in the market, and most likely the person with 1 Rs will get only the left over. If the market has enough people with 100 Rs, the person with 1 Rs, will have to go back empty handed. This is something that has happened in Indias growth story since Liberalization. Eventually, the growth will hit a saturation. Remember, the success story of Detroit was not that it made cars, it has made its population car owners. India is unfortunately the place, where the fisher man cant afford to buy the fish he catches, and the person who is building a house can never dream of owning one. There is a reason why high consumption has also created wealthy countries, because the higher the consumption the money spreads faster. The best way to create more wealth is to share the wealth. If you pay your worker 100 Rs, his net contribution to GDP is also only so much. But, the moment you pay him 500 Rs, you have actually increased that potential contribution to GDP by 5 times. That is another reason why manual labor in developed economies are extremely costly. So, the day India sees a growth explosion, you will have to get rid of your house-maids and your construction worker no longer sleep in slums that your work contractor has given him. 5. If you are still think inflation is bad, and sure we dont need this. There are the options. Go back to the socialist era, where the Government is free to fix the prices but you will knock at every Government door to give you a job, or enroll yourself in the employment list and prepare for your PSC exams. Because, the biggest casualty of a centrally controlled economy is its jobs. The other option is the Chinese model where the Government gets money from the Capitalist world and in turn run labor camps for them in the Chinese backyard. The good thing is, India is a democracy and we are free to make the choice.
Posted on: Sun, 18 May 2014 06:39:21 +0000
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