Tuesday, August 19, 2014

Inflation is going to stay for a long time in India

India is struggling with inflationary pressures for some time now. All attempt to contain the inflation by central bank and government has not yielded the desired result, apart from momentary successes. The successes also can be attributed to the supply of commodities at various time because of good harvest of crops, then anything else. Apart from that, the inflation has remained not to be tamed.
I believe inflation is going to stay for a long time in India to come. And we do not have to look


anywhere to understand this. The pure demand and supply equation is good enough to explain this. Inflation in the form of equation is a pure play between the purchasing capability or power in the hands of consumer and the sum of commodities/resources out there to be purchased. The purchasing power in India is coming in terms of the amount of money that is sitting in the system and which is increasing day in and day out. What in India we are seeing at the moment is driven primarily by monetary inflation, which results because of the increase in the money supply. It's not a inflation driven primarily by rise in the price of goods because of scarcity. The price rise happens because of the bids among the increase amount of money. The situation can be directly compared to the situation in Europe between second half 15th to first half of 17th century where a huge influx of gold and silver. Is India also in for such a perpetual long inflationary cycle. I am not sure right now but that can be one of the possibility. Considering that we are growing and bound to grow for some time to come, we will be seeing more and money coming in form of investment and this is going to increase the money supply further in the system. And we are not doing any good in terms of increasing the resource base. We are not focusing on agriculture as a major government policy, as governments are more busy with telecom and industrial sector and on the corruption as an after thought there.
The inflation in India we are seeing is a pure play of huge amount of money we are seeing in the system. The money primarily came from the developed countries in terms of huge investments being done in India. Than India Inc. went into US style loan culture in the first decade of 21st century. People has mortgaged there future for many years to come, to make their present better. But what many of them has landed into is a vicious cycle of debt payments every month. And it's not individuals but many small and big corporations. A corporation can still reduce the debt base by enlarging the equity size, but for an individual that's not always easy. One way is to go for higher paying jobs, but when someone gets so much engrossed in the monthly struggle, it's very easy to miss the woods for the trees.
Is inflation good or bad for India? This is I feel is really a judgmental question and it's difficult to have a take on it. Super inflations in general is bad from a perspective of inclusive growth in a country. The impact of inflation can be understood basically bu dividing the population in two parts. One who grow more than the growth of inflation and other grow lesser than the growth of inflation. We can even categorize the people having growth lesser than inflation growth as People below inflation line (PBIL). And I think, the government should focus on this line than the Below Poverty line. The logic is simple. Below inflation line people are those many of which are going to go below BPL in the future to come. Can we work beforehand with them, to understand and stop them from falling into the black holes. The people who are above the inflation growth line, do fret about it but they are also a reason for it. And usually they benefit out of it if they look into the spending pattern as a percentage of income rather than absolute values.
What we can do to save India from getting into a long lasting inflation. The answer is to be growth focussed. And where government should focus? I believe it should as a broad policy, focus more on the agriculture sector at any point of time. The reason is simple. Everyone needs to be fed properly and that can happen only when we can achieve good growth in agriculture. There is more need to that then anything else at the present moment. Another thing that government should focus on is the infrastructure and provide the conducive environment for people to be entrepreneu

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