Inflation is measured after taking into consideration the Wholesale Price Index (WPI) whereby the percentage change (of WPI) on a particular day over the same period in the previous year is calculated.
Inflation is related to a lot of indices and in a multiplier effect affects many macro indicators of the economy. It should be controlled is true, but to what extent depends on the economic variables. Controlling inflation in our economy calls for a multi faceted approach to the sectoral workings. The first fact needs to be seen whether it is an inflation through a demand pull or a cost-push factor.
Very briefly, a demand-pull price rise occurs when there is a higher demand with a relatively lower supply. Cost push inflation occurs wish a rise in the cost of factors of production thereby leading to a higher price for the finished goods. Both these factors are at work in the Indian context. In addition1 factors like high fiscal deficit which leads to a higher spending by the Government creating excess demand and high subsidies (for which ultimately it is the consumer who has to bear the cost) supplement the woes. It is interesting to observe that the better performance of the price indices in 1995-96 was along with a slower expansion M3 and a GDP growth of around 7 percent. But this was coupled with very high interest rates and the value of rupee eroded to a great extent.
True, inflation should always be checked. But a very low inflation for a developing economy also should not be welcomed with open arms. It leads to recessionary trends being set up through a disincentive to produce due to low prices and stagnant demand. As an example, the erstwhile USSR for over two decades had stable prices in essential items especially food. Leaving aside the political factors, what ultimately resulted was a poor economy with numerous production bottlenecks due to lack of incentives. If zero inflation was admirable then perhaps this would have been the best performed economy.
While there should be check to any sudden spurt in inflation, a steady level of inflation of around 3-4 per cent should be sustainable for a developing economy. For such a case, macro indicators like fiscal deficit, money supply, interest rates, all work together. In the Indian context these have failed to work in a cohesive manner to control inflation. Moreover speaking of grocery items, commodities like pulses, fruits, vegetables, tea, eggs, fish, meat, and oilseeds have made a continuous and pronounced upward rise. This hurts the man in the street directly.
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