Is achieving price stability becoming elusive?

Apart from shortages, wrong pricing, influenced by greed, adds to the inflationary pressure.
The recent announcement hiking petrol prices by Rs 5 came with a rider: further increases cannot be ruled out. Diesel and LPG price increases are also in the offing.

There may be compelling reasons for the hikes, the prime one being to help oil companies reduce their losses incurred because of high international crude oil prices.

But such increases have a cascading effect on the prices of goods, especially manufactured ones.

The production as well as marketing costs go up and these are often passed on to the consumers. Companies, in general, do not like to reduce their profit margins. On the contrary, they often try to exploit the situation.

The argument that raising the prices of petrol alone, and leaving out diesel and liquefied gas, may not have an adverse impact on overall prices is flawed.

For instance, all expenditure incurred by a company, including on perks such as leave travel concession and regular conveyance, get reflected in the cost to the company, and is ultimately borne by the consumers.

The relationship between production cost and the final price paid by the consumer is not subject to any regulation. However, in a perfectly competitive market the prices reach an equilibrium level in the long run. In the process, the affordability of the consumers also gets factored.

Unfortunately, in our economy, all costs, direct or indirect, are borne by the common masses. Audit of ethics in the business is seldom done and corporate governance, if practised at all, is by and large for publicity and and not for benefiting the common man in any significant way.

Still high

Inflation, which has been in double digits for some time now, continues to be high despite a series of measures by the Reserve Bank of India to contain the demand side pressures.

Too much money chasing too few goods is how inflation is generally defined. It simply means there is a mismatch between demand for and supply of goods, and the value of money is getting eroded.

The demand is fuelled by an increase in purchasing power, a rise in population, enhanced employment opportunities, hoarding in anticipation of shortage of goods, and improved standard of living.

The supply side reflects total goods and services produced in the economy. The production of goods (which basically fall under either agricultural and manufactured) is dependent on several factors.

These are timely monsoon, conducive weather, and adequate availability of money, material, machinery and manpower, to complete the production cycle.

Supply factors

The supply is dependent on factors such as proper storage of perishable and non-perishable goods, and packing and transportation across the country after identification of the market, time and costs involved.

Herein lies the need to match the supply and demand at acceptable costs. The pricing of goods and services is vital to minimise the difference between the demand and supply.

In the absence of adequate checks and balances, the pricing of goods is influenced by greed, corruption, and mismanagement of commodity surpluses.

Apart from shortage of goods, wrong pricing for want of effective regulation adds to inflationary pressure.

Monetary and fiscal policies have to go hand in hand to ensure that there is more or less a match between demand and supply and there is no scope for excessive pricing.

The traditional approach of the RBI to contain inflation, by following a dear money policy and, at the same time, ensuring adequate credit for supporting growth of the economy, has its limitations.

Though, by and large, such an approach has been successful in the past, the situation now is different and changing fast. It is time, therefore, for the RBI to completely review its policy stance in the context shortcomings in the management of the economy, including fiscal deficit, widespread black money, corruption, pricing of essential goods and assets without any relevance to the purchasing power of a large segment of the masses, and so on.

How much monetaryand fiscal policies contribute to the change in the Wholesale Price Index, which is broadly the indicator of inflation in the economy, is not being assessed. It is time for such an assessment

Procurement, storage, transportation, marketing and pricing of goods do not seem subject to any governance standards, resulting either in short-supply or a glut in the market. This leads to not only wastage of essential items but also losses in revenue and energy.

Allowing for export/import of goods at competitive prices to contain inflation does not seem to be getting the attention it deserves. Accountability/responsibility for wrong and exploitative pricing of goods is not being fixed.

Local boards

Local boards of the the RBI can, perhaps, be actively involved and used as a major source of information to identify the areas of concern for inflation management.

Control at the regional level and overseeing coordination between Nabard, State governments and other local bodies (such as chambers of commerce and industry) could well be the forte of local boards.

They can be an effective tool in understanding the issues in pricing of products, marketing, distribution and management of supplies.

These local boards, which consist of eminent members from different fields, can be a rich source of feedback or advice for the RBI on various aspects that have a direct bearing on growth, efficient management of the economy and inflation at the regional level.

The overall approach of the Government and the RBI should be to identify the gaps in fiscal and monetary policies, the contributory factors fuelling inflation and then initiate measures in a coordinated manner without giving scope for a blame-game when inflation rises. Price stability and growth are essential to make inclusive growth a reality.


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Monetary and fiscal policies have to go hand in hand to ensure that the demand for and supply of goods more or less match and there is no scope for excessive pricing.


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Dr.T. V. Gopalakrishnan

(This article appeared in The Hindu Business Line dated 13th June 2011)