How India Should Combat Inflation
Indian inflation has just hit a 3-year high of 7.41%. We can take comfort from the fact that many of our neighbors are faced with 20%; even China has reported an 11-year high of 8.7%.
Global trends are cited as the primary reason for the present situation. The IMF has reported that food prices in February were 65% more than in 2005; metal prices were up by 70% since 2005 and petroleum products have shot up by over 175%. A buoyant economy, shortfall in production of several goods, sky-rocketing crude prices, and the diversion of food crops for bio-fuel have all contributed to rising prices.
Already the attention-grabbing tax cuts and the massive US$15 billion write-off of farm loans announced in the budget have paled into insignificance. Several states have elections scheduled for this year and election to the Indian Parliament is just a year away. One political party has already launched an agitation against rising prices while the left parties, who support the government from outside (authority without responsibility), have threatened to launch an agitation on April 15.
As a knee-jerk reaction, the government has announced that "all fiscal, regulatory and suppl- side measures to rein-in inflation would be taken." In other words, too much rhetoric, too little substance. It is well known that any monetary measure would take at least 8-10 months to show results. Import duties have been cut on a few products. Similarly, exports of certain commodities have been banned. These are unlikely to have much impact - when import duties are cut, exporters in other countries invariably increase prices, thus neutralizing the effect of lower duties.
The government finds itself in a Catch-22 situation. Accustomed as we are to reasonably high growth rates, any effort to reduce consumption/demand -- such as by increasing interest rates or the cash reserve ratio -- may have an adverse effect on growth, alienating significant sections of...