X

Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.


Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Indian Stock Market News, Equity Market and Sensex Today in India | Equitymaster
Investing in India? Get Equitymaster Research  
How can the government control inflation 
(Fri, 17 Jun Pre-Open) 
 
The Reserve Bank of India (RBI) hiked the interest rates by 0.25% yesterday. This was the ninth consecutive hike by the central bank. The underlying reason for these hikes remains the same - higher inflation. But despite the government's consistent efforts, inflation still seems to be spiraling out of control.

So this leaves us with another question as to what else can the government do to control inflation? Should it keep on increasing interest rates through the monetary policy every few weeks? Well this is not an option that can continue for too long. Higher interest rates force organizations and consumers alike to postpone their buying or spending decisions. This in turn hampers economic growth and leads to problems of unemployment.

Another option that the government has is to use the fiscal policy to check inflation. This means that the government raises tax rates, which in turn would bring down disposable income and would hence impact demand. In addition to this, the government would cut down its own spending as well as borrowing targets as well. This would reduce the demand pulled inflation in the country. But it would come at a great cost of higher unemployment as well as slower economic growth.

The government could choose yet another alternative of direct intervention. It could set limits on the rate of growth of wages. This would reduce the disposable income available to the people and in turn would help curtail demand thereby bringing down the prices. However, in a country like ours, this option is not a very viable one. Labour unions are strong and in such cases would retaliate through strikes. This would just lead to chaos in the country which would lead to more social and economical damage than help the situation.

The last option that the government has is to reform the long-term policies related to labour as well as the supply side. Reforming these policies would remove the bottlenecks that exist in the supply chain. This would effectively help reduce the cost push inflation. Reforming labour policies would help weaken trade unions and give more flexibility for healthier negotiations for both the companies as well as for the employees. This in turn would help control the wage cost inflation in the long term.

As of now, it does appear that India has used the monetary policy effectively to control the demand push inflation (inflation caused by increased demand). However, the fact that inflation rates are still spiraling upwards suggest that the inflation is driven more by costs now. Therefore, it calls for the government to change its policies and look at alternatives to control the same. Otherwise, we may be in for an era of higher inflation rates for quite some time in the future.

For information on how to pick stocks that have the potential to deliver big returns, download our special report now!

View all commentaries | Archives  RSS
Read the latest Market Commentary
 
BSE-30
 

 
Go
 

Equitymaster requests your view! Post a comment on "How can the government control inflation". Click here!

1 Responses to "How can the government control inflation"

Prakash Madnani

Jun 18, 2011

Sir , Inflation can be controlled to a large extent if Government comes out with a PRAGMATIC & PRACTICAL VOLUNTARY DISCLOSURE SCHEME which can not only bring back hoardes of cash lying in illegal overseas accounts besides the cash stashed in the country as Black Money.

Like 
  
Equitymaster requests your view! Post a comment on "How can the government control inflation". Click here!
 

Become A Smarter Investor In
Just 5 Minutes

Multibagger Stocks Guide 2017
Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
We will never sell or rent your email id.
Please read our Terms

S&P BSE SENSEX


Jul 26, 2017 (Close)

MARKET STATS