How can we control
Inflation?
There are several measures
that can be taken to effectively control inflation before it gets
out of hand. Given that inflation is a result of cost push or
demand pull functions in economy and imbalance between supply and demand of
goods and services at current prices, so measures be taken to reduce costs and
demand and increase supply of goods and services. Following measures in this
regard are suggested;-
THE SUPPLY
SIDE;
a) Increased Production;
The supply of goods and
services can be increased by increasing Industrial and Agricultural production.
Agricultural production can be increased by providing an adequate supply of
agricultural inputs at low prices, modernization of agricultural, scientific farm
management, adequate water supply for irrigation etc. Similarly Industrial
production can be increased by giving incentives for increased production,
foreign direct investment, credit growth fiscal concession etc.
b) Reducing
costs of Production;
Reducing cost of debt; - decreased interest rates on Industrial and Agricultural
loans.
Reducing labor cost; - Reducing minimum wage thus inviting more entrepreneurs
into production.
Reducing price of raw
materials; -, Lots of raw material is supplied by
or is under control of Government or Politicians like mining products or by
freeing imports from duties and tariffs.
Reducing prices of Gas,
Energy, transportation etc will lead
to lower costs of production and supply there nullifying cost push inflation.
c) Control of
Illegal Activities;
There are some illegal
activities that cause significant inflation in economy. It is hoarding,
smuggling, profiteering, black marketing etc. In the case of smuggling of large
staples of sugar, butter, wheat rice etc are exported illegally in order to
obtain higher prices. Similarly the shortage in most cases are artificially
created to increase profits. All such activities must be controlled through
advertisements, giving rewards to informants, and punishments to offenders.
d) Price and Security;
Production and
distribution of goods can be affected due to existence of unease and insecurity
or disorder in society. In such circumstances, investors are hesitant to invest
for fear of potential loss. Similarly, the production of Industrial products is
affected due to several unpleasant events such as strikes, public disorder,
rallies riots etc. Therefore peace and security must be ensured to maintain
regular supply of goods and services.
e) Maintain Energy Resources;
The supply of agricultural and industrial products is highly dependent on energy availability. If the energy availability is irregular or expensive it will adversely affect supply and its costs and will become expensive. Increased costs causes inflation. Therefore all necessary measures be taken to provide regular supply of major sources of energy to agricultural and industrial sector at constant costs.
THE DEMAND
SIDE;
a) Control of Money
Supply;
The money supply has great
influence on rising inflation that is, money supply increases demand and
thereby increases inflation and vise verse. Therefore to control inflation,
measures must be taken to control money supply. The money supply can be
controlled with the help of Monetary policy in which Central Bank of a Country
uses various methods, such as Bank Rate policy, open market operations,
changing reserve requirements, credit rationing, direct market intervention
etc. All these methods are useful to control inflation in a country.
b) There is no deficit Financing;
Deficit financing shows that public is spending beyond their income. To some extent it will lead to development but it will also lead to inflation. Deficit financing is used to finance additional costs of budget deficit. This leads to increased money supply in economy. Therefore deficit financing should be discouraged and all developmental financing should be met through taxes and debt sale.
c) Population control;
In most developing countries, the population is increasing very quickly, whereas production of goods and services is not increasing at same pace. This leads to imbalance between demand and supply of goods and services which leads to inflation. Therefore, to control inflation, appropriate measures should be taken to control the population.
d) Fiscal Policy;
Fiscal policy refers to Government policy of public spending and taxes. The main objective of Fiscal policy is to maintain only a slight change in the general price level. During inflation, the government tries to reduce its expenditure on unproductive activities and the direct tax rate increases so that the purchasing power of the population is reduced. Due to reduction in the purchasing power of the population, demand of goods and services will be reduced leading to controlled Inflation.
e) Direct Measures;
There are several other options available to the government to control inflation and wage and price freeze, rationing of goods, establishments of public service shops, price review / stabilization committees. These several measures are often used by Governments to control inflation.
Kapil Dev Aggarwal
