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Inflation: Does it have the right solution?
KRB | 18 Jan 2011

The problem of price rise (inflation) is posing major hardship for both public and reigning Bapus as well, leading to massive anguish among the populace, in particular among the downtrodden.

THE PROBLEM of price rise (inflation) is posing a major hardship for both public and reigning Babus as well, leading to massive anguish among the populace, in particular amongst the downtrodden.

The causes for such massive price rise are manifold and among these notable are government policies, reduction in goods production, heavy increase in demand and other relevant reasons such as natural calamities etc.

Though, the government's idea to reshape the economy has been well received within certain quarters, the overall reaction looks to be loss of hope on the sincerity of the regime in finding lasting solutions towards the gripping problem.

 NDA government in the past attempted to do different things by restoring some order in movement of food grains within the states. It also encouraged food grains export while production superseded domestic requirement. However, it lost power in two states after sudden increase of onion and tomato prices. This bitter lesson forced them to postpone the hike of oil prices as long as possible till they held on to power.

Inflationary trend was a changing phenomenon during the last decade. For example during 1997 it was 7.2 percent and went up to 13.2 percent in the very next year and later almost below 5.0 during the NDA regime. Once UPA came to power the inflationary pressure started to rise again.

Current Scenario

Currently, the problem seems to be more acute than expected as triggered by global recession and certain amount of natural causes. In the post-recession scenario, the government looks out to roll-back all the concessions given to the industry. In the new budget it has suggested tax relief to the above middle class earners to boost demand so that it revitalises the economy.

Exploding dollar exchange rate has become a disadvantage to India by increasing pressure to pay more for imports and receive less for exports as competition increases.

Recent information says that foreign remittances exceed FII and FDI inflows into the country. This is one of the interesting issues that have to be seen as a future potential fiscal feature that has to be taken into account before making any decisions. Because it has a potent to boost up money circulation that is without any productive action/function with in the economy.

The increase in tax limit in the recent budget may trigger inflation along with the fuel price hike and it is evident now the economy is witnessing double inflation crisis whereas food inflation continues with same vigour and so does fuel inflation. Why has the government gone for a reduction to enable more money flow rather than restrict that with more tax saving options? By doing this it can increase receipts and contain inflationary tendencies as well?

On the other hand it can reduce the tax components for the fuel which will benefit the public with reduced cost of living. In that case, economy will expand without further inflationary process.

Alternatively it can mobilise savings attached with little more interest rate for up to 2-3 years and let it be implemented by state governments. In turn, they can manage with mobilised money, fund their projects or fill the deficit gap and more over don’t ask the Centre for financial assistance up to certain extent.

These measures are little long-term beneficial but the immediate result is to reduce the inflationary pressure, which is detrimental for the health of the economy.