Dr Ashwani Mahajan
Economy was in doldrums, when Raghu Rajan took over as Governor, RBI. Rupee had depreciated considerably from rupee 54 to rupees 68.8 per US$, short while ago. Current Account Deficit (CAD) has skyrocketed to $88 billion, eroding the credibility of the country. Rate of inflation had been rising continuously month after month.
As such, naturally, Raghu Rajan aroused lot of expectations, about solution to these problems. Raghu Rajan announced lot of measures in his maiden monetary policy announcement. ‘Swap’ strategy was unfolded and measures for tightening of money market were also announced. Sleuth of measures to curb gold imports were also stated.
Rupee strengthened to some extent and has been rallying around rupees 61-62 per US$. Earlier fall of rupee was being cited as the main cause of mounting inflation rate. We import huge amount of crude oil, finished goods, raw material, project goods etc. from rest of the world. Weakening of rupee was making these imports dearer, leading to hike in energy prices (petro products) industrial raw materials and various other costs. This in fact was classic example of imported inflation.
It was therefore natural to expect that with strengthening of rupee, inflation would be taken care of. But that did not happen. According to the data released by the government, rate of inflation in terms of Wholesale Price Index (WPI) has increased to 6.42 percent in September, from 6.1 percent a month ago. This rate of inflation was merely 4.5 percent in May 2013. If we take Consumer Price Index, the rate of inflation was 9.84 percent in September 2013.
Rate of inflation is much higher in food items. Food inflation has been estimated to be 18 percent in the last 2 months. RBI has also conceded that rate of inflation has gone much beyond the comfortable rate (which is 5 percent). To somehow curb inflation, RBI once again raised repo rate by 0.25 percent (along with increase in Marginal Standing Facility)
Rising Miseries of the General Public
Barring government servants, almost all workers (both casual and salaried) have defined and limited income in term of rupees and is not linked with inflation. And with increase in cost of living due to inflation, it becomes difficult to maintain their households. And when prices of essential eatables such as cereals, pulses, fruits & vegetables and edible oils etc increase; and food basket shrinks or children are deprived of milk and other nutrients, it is most painful for the commoners.
Rising transport costs, electricity tariff and price of other essential goods and services, erodes living standards. Rising interest rates due to inflation, lead to increase in EMIs, not only for new loans, but loans taken previously as well. People in the government, in order to compose the commoners make repeated promises, that prices will be controlled soon. Sometimes some commodity such as onion, become the symbol of inflation and governments try to absolve of duty by selling onions at subsidized prices. But inflation continues.
Poor is The Worst Affected
Poor are the worst affected by the inflation. If we look at the wages data and compare the same with inflation, situation becomes clear. According to the data published by Annual Survey of Industries, we find that average annual wages of the labour in factories was rupees 18,645 in 1989-90, which could increase to only rupees 75,281 in 2009-10 (that is 4 times increase). However, if we look at the price index it increased by 5 times. This implies that during this period, real wages declined by 20 percent. Per Capita income (average income) increased 8 times during this period, which means that benefits of growth actually were grabbed by the rich and poor were the net loses. We have to ensure that growth does not become the medium to enrich the already prosperous to the disadvantage of the poor.
Why Inflation is Unstoppable?
RBI has been making efforts including increase in interest rates and tightening of money to keep inflation under check, but without any success. In fact despite all policy measures, inflation is not only continuing, but rather has accelerated. It is important to know why inflation could not be controlled. According to the principles of economics, there are two types of causes of inflation. One, increase in demand and two increase in cost. Increase in demand is primarily caused by increase in incomes and increase in money supply. Money income in the country has been increasing continuously. Annual per capita income, which was rupees 16,688 in 2000-01, increased to rupees 68,757 by 2012-13 (4 times). Along with increase in incomes, money supply has also multiplied. It is notable that during this period money supply increased by 5 times. Increase in government expenditure is the major cause of increase in money supply. Multiplying incomes and money supply is causing hike in demand.
Increase in demand would not be a cause of worry, if supply matches demand. But unfortunately supply could not increase simultaneously. As a result prices have been rising. Along with this rising price of petroleum products, raw materials and rising costs have been disturbing supply all along. Inflation in food products have been the most worrying phenomenon. Food inflation has been double of general inflation. Reason for this was neglect of agriculture, causing near stagnant agricultural production. Today prices of agricultural products like food grain, pulse, edible oils, fruits & vegetables are sky rocketing, causing hardships for the commoners.
RBI Lacks Solution
RBI cannot correct all misdeeds of the government. Undoubtedly, inflation is the result of mismatch in supply and demand and excessive expenditure of the government. To curb excessive demand, what RBI can do is that it can keep credit under check. But such type of monetary policy of contracting credit, may affect growth adversely; as curb on credit would lead to smaller purchases of cars, consumer durables, houses etc. by the people. This would offer disincentive for growth. Therefore it is imperative to impose effective curbs on government spending, to keep money supply under check. Alongside all efforts be made to encourage agricultural production, to keep in check the food inflation. Effective curbs on unnecessary imports may help us keep balance of payment deficit under check and stop depreciation in value of rupee.
(The author is Associate Professor, Department of Economics)
Follow our WhatsApp channel