TACKLING INFLATION THE RIGHT WAY

Economist John Maynard Keynes said, “Inflation is a form of taxation which the public find hardest to evade and even the weakest government can enforce when it can enforce nothing else.” This invisible tax eats into the savings and incomes of the rich and poor alike, but impacts the lower rung more. In a developing economy like ours, the absence of a social security safety net and absence of income and employment insurance in the unorganized sector (which employs a significant portion of our population) severely aggravates the inflationary consequences for lower and lower-middle class families. The published inflation rate clouds the all important rate of increase in the price of basic food articles which affects the majority of our population.

Many attribute the current spike in inflation to global externalities like widespread commodity price rise, supply shortages, demand increases, etc. This is true only to a certain extent but there are various India specific factors that can be calibrated to tame inflation. Here are a few.

1. Money Supply Levels: When the supply of money increases, there tends to be a cyclical effect of more money chasing the same number of goods and services, directly inflating their prices. A post analysis of the most vicious inflationary periods of recent times (Germany and Japan in the 1970s, USA from 1973 to 1982) showed that the primary driver of inflation was high levels of money supply. By simply looking at RBI statements, it is clear that money supply in increasing at an alarming rate. This must be controlled, and RBI has been taking steps in the right direction in this department (by hiking CRR, SLR and other important rates). But the pace of tightening has to be accelerated even if it is at the cost of a slow growth rate for 1-2 years.

2. Currency Suppression: Despite the endorsement of many economists and other financial pundits, our Reserve Bank continues to control our currency, not allowing market forces to dictate the right price. This flawed approach to undervalue the currency to help only export-oriented industries is wrong and unsustainable in the long run. The government should slowly adopt a hands-off approach to currency management and let the Indian Rupee appreciate.

A stronger Rupee will automatically reduce food exports, keeping more food at home, hence increasing supply. The increased purchasing power of our currency will help us buy more food and essentials from abroad (increasing supply again) and the cost of goods and services at home will decrease (because of the increased purchasing power of our currency) coalescing to suppress inflation.

3. Other Temporary Policies: In addition to this, our Government should also announce some emergency policies like temporary food credit, or water/electricity subsidy for lower and lower middle class families to help them navigate these tough times. Raging inflation is also a disincentive to save and families that live on low wages struggle to make ends meet. This should be considered by the Center and some temporary measures to help our economically backward must be implemented.