Tuesday, February 20, 2007

About controlling inflation: again

I have been asked in the chat box on Indian Current Affairs blog like this:

“can we say it is becoz of inflation crude prices has gone up”

I answered to that as below:

“NOOOOO. Crude prices are decided by the international markets. Crude is not a commodity sold as such in India for consumers.”

I don’t how many of you have taken it for granted, how many of you have written it off as incorrect and how many were agnostic.

Inflation, being a hot topic, viewed at any which way, the debate will rage for some more time to come. And more and more reams would be written about it. Today’s ET has an excellent debate on the topic again. Without much beating around the bush, let me make two points here:

  1. Rising international crude prices will have an impact on inflation in the country. It is a different story that the country’s financial managers (read the FM, the PM and the RBI) will do their best to soften the impact for the common man in their own way. They may prefer not to pass on the entire burden of the price impact directly to the common man. But if it is not direct, its impact will anyway be felt indirectly. You have to pay your dues some day. An abnormal increase in fuel costs would certainly lead to higher transportation costs and this would in turn lead to higher commodity prices. There may be some time lag; but how long will that lag be, is anybody’s guess. Perhaps, the current bout of inflation seen in the last few weeks is a result of the hardened international crude prices during most of the middle and end parts of last year.
  2. Most of the experts keep talking of supply side pressures as being responsible for inflation. They also say that the measures initiated now – viz., reducing the import duties and tightening the money supply, are only short term measures and that long term measures need to be taken. What measures constitute this ‘fundamental’ approach to tackle supply side pressures? Aggregate supply can be increased through:
    1. Greater investment and capacity creation
    2. Increase in educated labour force
    3. Improved productivity in the use of existing resources
    4. Technological change and innovations.