Govt must take urgent steps to handle inflation

GP Baroowa
IN 2008, inflation had touched a record high forcing the Government and the RBI to take stringent measures to bring down the prices of food products . The rising prices of crude oil fuelled the inflation and it was not possible for a while to control the inflationary pressure. But fortunately, due to steps taken by the RBI, the prices of goods have started falling. All heaved a shy of relief when the first sign of falling inflation was noticed.

The rate of inflation on June 7, 2008 was 11.66% .The end of January saw inflation coming down to 3.2%..But, during February, inflation came down to 2.43%. This was one of the lowest levels of inflation. Economists are not sure whether it is a good sign or signal of incoming turmoil. People are confused to see that prices of consumer goods have taken an upward trend. What is this? Prices of potatoes and onions have gone up by 20% in the month of March yet the official figure of inflation has gone down. Now, inflation has touched 0 .44%. Never in the history of modern India inflation has gone down to this extent. A section of economists have started feeling whether the country is passing through a state of deflation?

Montek Singh Alluhwalia has defended that lower inflation does not necessarily mean a state of deflation. He felt that economy might register lower inflation some time but out of such trend of inflation would rejuvenate the economy by creating fresh demand. Yes, lower inflation does not necessarily mean a state of deflation. What is the meaning of deflation? In common term, deflation is generally considered to be “falling prices” while inflation is “rising prices”. Actually this is “price inflation” as opposed to “monetary inflation”.

However, every month some prices are rising while others are falling. So the inflation rate is a compilation of all of these factors. Currently, we have some major inflationary forces combined with some deflationary forces.

On the inflationary side we have rampant money creation, and rupee devaluation compared to other currencies. On the deflationary side we have the sub-prime fiasco, which is reducing liquidity for banks and causing housing prices to fall.

Many economists feel sooner or later the rate of inflation may come down to zero. But do not panic. Zero inflation does not mean disaster. The countries like Austria, Switzerland have zero inflation but these are the countries where prices are greatly stable. One thing must be kept in mind though rate of inflation has reached 0.44%, yet the real rate of inflation compared to last year is still higher, which does not get reflected in the maze of statistics. According to us the price will stabilize sooner or later. However Inflation affects the middle class harder because the prices of things they buy go up while their income stays the same. I am not afraid of deflation as such. It would balance out soon. What I am afraid of is stagflation. The simple definition of Stagflation is a “stagnant economy coupled with price inflation”. This would be dangerous for our economy.

Readers can send their feedback at gpbarua@yahoo.co.in ASSAM TRIBUNE