The reasons for containing inflation despite a good monsoon and a reasonably balanced monetary policy have to be identified and measures other than conventional ones need to be thought of.
The monetary policy measures of the Reserve Bank to contain inflation keeping in view at the same time the need to support the economic growth envisaged at around 9 percent do not seem to have any desired impact indicating that the solution for the present inflation lies elsewhere. Monetary policy alone cannot bring down inflation beyond certain level is what the figures indicate. The food inflation continues to soar touching 18.32 per cent and the whole sale price index hovers around 7. 5 per cent. The authorities particularly the Government do not seem to have any clues as to how to contain the inflation particularly food inflation as the prices of very essential items consumed by the masses in particular for their very survival continue to be raising.
Catch 22 situation
As regards containing prices of commodities, the authorities are in a catch 22 situation now. The economy needs credit for growth, but money supply needs to be curtailed to contain inflation. The dearer money policy already in vogue if intensified and pursued further will have other long term implications as such a policy can attract hot money from abroad and then the problem of absorbing inflows without increasing money supply has to be tackled.
Further, cost of production which is already high if allowed to be increased on account of dearer money policy as it will have an all round effect of increasing input costs may again affect growth of the economy. Balancing growth with price stability is always the objective of the Reserve Banks’ monetary policy and it is always a challenge in a growing economy with a sizeable population suffering from poverty and unemployment.
No doubt the high level of inflation continues to be a cause for concern and there are no signs of it coming down. The reasons for continued persistence of inflation despite a good monsoon and reasonably balanced monetary policy have to be identified and measures other than conventional have to be thought of.
Anticipate Demand
The increased demand for food items due to improved purchasing power cited as a cause for inflation although reflects positively the good GDP growth registered by the economy and is a sign of welfare of the economy, then the policy and planning to anticipate such a demand and improve the supply have been completely lost sight of and need to be factored into in future planning and framing of policies.
Supply needs to be augmented for which production and export, import policies need to be fine tuned. Corruption, black money and mal administration in the procurement, transportation, storage, whole sale and retail distribution of products of mass consumption have been well known and no serious attempt has been made for decades to set right the situation.
Hoarding and black marketing of essential items with the support of both bank funds and black money have been an open secret and with the removal of selective credit control on sensitive commodities by the Reserve Bank as part of liberalization, these problems have got accentuated. As long as good character, ethics and values are absent, rules have to be strictly observed and any violation of rules needs to be severely dealt with to bring some order in carrying out economic activities. Liberalization cannot be at the cost of ethics in the economy is the message what the present inflation broadly indicates.
Selective Controls
With all the limitations, the Reserve banks’ next policy review due in the end of January may have to consider reintroduction of the selective control on sensitive commodities and discourage hoarding and black marketing using bank funds.
Cost of advances in particular to traders / wholesalers dealing in essential items need to be made costlier and continuous and close monitoring of banks’ exposure to these advances need to be ensured. Risk weights for such advances can also be hiked giving the signal that the Reserve Bank cannot any more tolerate banks using deposits for undesirable activities.
The negative rate of return on deposit interest rate because of high level of inflation persisting for quite some time seem to have prompted savers to spend more and divert their deposits from banks to other forms of assets such as post office savings, real estate, gold and other commodities. This has increased the price of commodities in general.
Of course banks taking the cue from the Reserve Banks’ Governor’s message made in the Bank Economists’ conference to increase deposit rate and lower interest rate on advances, have, of late, started realizing the need to raise deposits as the only source of dependable funds and have since been raisings deposit rates to attract savings. Bringing back the deposits to the banking system will have a softening effect on the prices of commodities.
Cash Transactions
Cash circulation in the economy is very high and transactions in cash encourage black money and corruption. This supports the inflationary trend in the economy. Some measures from the Reserve Bank to discourage cash transactions by insisting on cheque card payments etc for transactions beyond Rs 5000 can have some positive effects in the long run to contain inflation. Ensuring financial inclusion particularly of those having good means is very essential in the economy.
Deregulation of Savings Bank Deposit rate needs to be expedited to attract small savers to banks and banks have to find ways and means to reduce their intermediation cost through improved products and productivity.
Assessment of individual bank’s performance in keeping the intermediation cost low, attracting fresh deposits, bringing down NIM and at the same time improving the profit margin through earnings other than high interest on advances, quality of advances taking into account speculative advances etc needs to be made separately and high performers to be encouraged with special incentives. There is an urgent need to fight inflation and keep the cost of production and supply in the economy low.
(This appeared in Business Line dated 11/01/11)
Dr T.V.Gopalakrishnan
The monetary policy measures of the Reserve Bank to contain inflation keeping in view at the same time the need to support the economic growth envisaged at around 9 percent do not seem to have any desired impact indicating that the solution for the present inflation lies elsewhere. Monetary policy alone cannot bring down inflation beyond certain level is what the figures indicate. The food inflation continues to soar touching 18.32 per cent and the whole sale price index hovers around 7. 5 per cent. The authorities particularly the Government do not seem to have any clues as to how to contain the inflation particularly food inflation as the prices of very essential items consumed by the masses in particular for their very survival continue to be raising.
Catch 22 situation
As regards containing prices of commodities, the authorities are in a catch 22 situation now. The economy needs credit for growth, but money supply needs to be curtailed to contain inflation. The dearer money policy already in vogue if intensified and pursued further will have other long term implications as such a policy can attract hot money from abroad and then the problem of absorbing inflows without increasing money supply has to be tackled.
Further, cost of production which is already high if allowed to be increased on account of dearer money policy as it will have an all round effect of increasing input costs may again affect growth of the economy. Balancing growth with price stability is always the objective of the Reserve Banks’ monetary policy and it is always a challenge in a growing economy with a sizeable population suffering from poverty and unemployment.
No doubt the high level of inflation continues to be a cause for concern and there are no signs of it coming down. The reasons for continued persistence of inflation despite a good monsoon and reasonably balanced monetary policy have to be identified and measures other than conventional have to be thought of.
Anticipate Demand
The increased demand for food items due to improved purchasing power cited as a cause for inflation although reflects positively the good GDP growth registered by the economy and is a sign of welfare of the economy, then the policy and planning to anticipate such a demand and improve the supply have been completely lost sight of and need to be factored into in future planning and framing of policies.
Supply needs to be augmented for which production and export, import policies need to be fine tuned. Corruption, black money and mal administration in the procurement, transportation, storage, whole sale and retail distribution of products of mass consumption have been well known and no serious attempt has been made for decades to set right the situation.
Hoarding and black marketing of essential items with the support of both bank funds and black money have been an open secret and with the removal of selective credit control on sensitive commodities by the Reserve Bank as part of liberalization, these problems have got accentuated. As long as good character, ethics and values are absent, rules have to be strictly observed and any violation of rules needs to be severely dealt with to bring some order in carrying out economic activities. Liberalization cannot be at the cost of ethics in the economy is the message what the present inflation broadly indicates.
Selective Controls
With all the limitations, the Reserve banks’ next policy review due in the end of January may have to consider reintroduction of the selective control on sensitive commodities and discourage hoarding and black marketing using bank funds.
Cost of advances in particular to traders / wholesalers dealing in essential items need to be made costlier and continuous and close monitoring of banks’ exposure to these advances need to be ensured. Risk weights for such advances can also be hiked giving the signal that the Reserve Bank cannot any more tolerate banks using deposits for undesirable activities.
The negative rate of return on deposit interest rate because of high level of inflation persisting for quite some time seem to have prompted savers to spend more and divert their deposits from banks to other forms of assets such as post office savings, real estate, gold and other commodities. This has increased the price of commodities in general.
Of course banks taking the cue from the Reserve Banks’ Governor’s message made in the Bank Economists’ conference to increase deposit rate and lower interest rate on advances, have, of late, started realizing the need to raise deposits as the only source of dependable funds and have since been raisings deposit rates to attract savings. Bringing back the deposits to the banking system will have a softening effect on the prices of commodities.
Cash Transactions
Cash circulation in the economy is very high and transactions in cash encourage black money and corruption. This supports the inflationary trend in the economy. Some measures from the Reserve Bank to discourage cash transactions by insisting on cheque card payments etc for transactions beyond Rs 5000 can have some positive effects in the long run to contain inflation. Ensuring financial inclusion particularly of those having good means is very essential in the economy.
Deregulation of Savings Bank Deposit rate needs to be expedited to attract small savers to banks and banks have to find ways and means to reduce their intermediation cost through improved products and productivity.
Assessment of individual bank’s performance in keeping the intermediation cost low, attracting fresh deposits, bringing down NIM and at the same time improving the profit margin through earnings other than high interest on advances, quality of advances taking into account speculative advances etc needs to be made separately and high performers to be encouraged with special incentives. There is an urgent need to fight inflation and keep the cost of production and supply in the economy low.
(This appeared in Business Line dated 11/01/11)
Dr T.V.Gopalakrishnan
1 comment:
This is the exhaustive article on containing Inflation that deserves reading by those who matter. But all the measures cannot pull out the excess fat in the economy that reached cancerous level. Painless surgery is a must. Yerram Raju
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