I read a similar Oped in Indian Express yesterday. I guess Inflation is the cost that you have to pay for high growth. Will monetary policy like reducing the money supply by increasing the RBI lending rate help in containing inflation? My other question to the columnist is why is the supply side not able to meet demand? Is it because we have not been able to bring in liberalization and reforms in the farm and essential commodities sector? Will opening up retail industries bring efficiency in the farm produce and other regulated structure? I agree that as long as the real wages increases inflation does not hurt anyone and once the supply increases to meet demand than things will be hunky dory again.
RE:Nice commentary
by Rohit on Mar 22, 2007 09:02 AM
Let me try and answer your very thoughtful questions: -reducing Money Supply ALWAYS reduces inflation because inflation is ultimately a Monetary phenomena, i.e. too much money chasing too few goods. In India%u2019s case Inflation is driven by rising Demand. Increasing interest rates will reduce demand, because people will have less money to spend after increased interest payments. -India's supply bottlenecks stem from her weak infrastructure. It costs a lot to ship goods and power failures increase the cost of production. Part of the cost is passed on to the consumer. -Liberalizing the farm sector will both reduce prices and farm incomes. 'Tis a double edged sword. Improved efficiency in agricultural production would lower inflationary pressure, but that requires better infrastructure, which mean more taxes. -Real GDP growth > 9% perforce means on AVERAGE wage increases will exceed inflation by 9%. However, everyones wages don't adjust automatically with inflation because most wages are set at fixed periods, usually once every few years. -You are very correct when you point out that inflation is ONLY a problem when ACTUAL inflation exceeds EXPECTED inflation.
Rohit Malhotra, PhD (Econ)
p.s. go and buy Nordhaus and Samuelsons textbook on introductory Economics. It will answer most of your questions.
