Inflation: monitory tightening and fiscal attempts

Inflation is getting bigger and bigger as concern for Indian economy. Research institutes are raising the growth expectations but the overall bright future is clouded with the single concern regarding increasing prices. Latest figure of 6.58% is at record high level in recent past.

Anybody knows that inflation is some sort of hazard that growth delivers. In a sense one can think that rising price level will accommodate the producers and truly it does. But on the other hand it hampers the consumption spree that lead the growth, thus cutting the major lifeline to the producers’ prosperity. Nominal wage definitely increases but with a time lag and that lag make the difference lowering the nominal value of money. Result is simple – the entire rose bed becomes thorny. Things get more sever when economy is running at or near full capacity, when stretching the supply up is near impossible.

Any attempt to tackle inflation has to have two channels, monitory and fiscal. In case of India major attempts taken are mainly monitory. RBI is ready with its arsenal to adjust the supply imbalance in short run. Major thrust for any monitory policy is at restricting the demand. But even under tightening monitory policy, high growth in domestic market may often induce the producer and consumer to overlook the initial tightening attempts. Again often with an expectation of further future restrictions, consumer and producer try to balance their expenditure in favor of current periods. As result, things move further out of control. So monitory policy as quick response to inflation may not work as it is intended to do.

In such case what comes handy is fiscal attempt. And major focus it carries is to clear the supply bottleneck. Fiscal-strikes try to accommodate production structure and raise the supply, which has prominent power to nail the price down. One can argue, capacity increase is no short-term incident, so fiscal measures cannot be a quick heal. But often tax regime and tariff structure creates restriction in supply chain; if such hindrance are cleared then even without any organic change in domestic capacity one can improve supply flow to some extent. Such attempt can provide some relief and time, which again allow working on long-term policy options, because it’s the time that is precious in such cases.

Credit growth is increasing at a pace more then the targeted rate even under tight monitory policy, real estate boom is still intact with more and more estate development projects are coming in. When Central bank is trying to check personal loan intake by increasing banking provisional requirements, trend is looking hardly scratched. Now government should think of balancing monitory policies with fiscal measures. That can positively keep the growth flavor intact and inflation at manageable level at least for some more days.