GD Monday – “India should focus on curbing inflation instead of boosting growth” – Week 6

Abhi

There is a healthy trade-off which needs to be maintained between Inflation and growth,depending on the strategic need of the hour for the country.It should also be independent of the vote-bank politics.Timely regulations by the RBI is an attempt to address the same.In the process of curbing inflation,growth will be impacted inevitably which will be suicidal under the circumstances for a country like India.With new policies being advocated in terms of facilitation of FDI and innovations in subsidies(hike in diesel prices and cap on cylinders),the intent is clearly to maintain if not amplify the constant growth rate in India.Once a sound growth rate is noted, we can think about curbing inflations by improvising policies.An environment is already established where a lot of healthy investments will take place and curbing inflation will results in higher amount of savings and hence less liquidity in the market.We should take clue from the recent measures taken up by USA to avoid 'fiscal cliff' as they resorted not to increase taxes and reduce their expenditures.A possible recession was avoided.

21 Jan 2013, 02.09 PM

Harshita V M

Indian economy, where the divide between the rich and poor has always been huge, growth is bound to first give benefits for the rich, while those benefits would take a long time to trickle down to the poor. Inflation, on the other hand, first affects the poor who are already hanging by a thread. The rich may lose some money but the poor may end up hungry. The government's focus should first be to make sure that the basic needs of food, clothing and shelter for each and every Indian citizen is satisfied. In this scenario, the government should not take steps that will worsen the inflation. Growth is certainly needed, but if it leads to risk of growth in inflation then it is better avoided.

21 Jan 2013, 02.15 PM

Harshita V M

As my friend Abhi here has brought up the point of the fiscal cliff in US, i would like to point out that the US government had decided to take the middle path. They did not do away with increase of taxes but rather reduced the increase in tax in a way that it did not severely affect the common man. The same I believe is true for India. Policies like the deregulation of cylinder prices as well as the cap on cylinders aimed at increasing the government revenue and facilitate growth efforts, are already burdening the common man. Policies like cut in interest rates to facilitate growth will further decrease the return from investments and savings. At this point I would also like to mention that a section of Indian population comprising of senior citizens depends solely on returns from investments and savings. With rising prices and lowering values of savings their living conditions are bound to deteriorate. Hence I still believe that curbing inflation and bringing everyone to a safe state should be of higher priority than facilitating growth.

21 Jan 2013, 03.16 PM

@sharinggyan

Great economists have been stumpedby this question and find it is hard to choose one over the other. A middle path may not provide us the results we are looking for. If we take India's example - the fiscal policies are growth oriented with a push for FDI taking the limelight while the monetary policies are looking to hold inflation and bring it down by keeping the interest rates high. I personally believe bringing down inflation is a bigger problem and more complex because - it is hard to pin point at one as the cause, different commodities affect inflation differently and a growing economy without proper spread of its benefits keeps fuelling the prices up. Keeping interest rates high to induce savings, reducing supply chain hassles, maintaining the subsidies for a while longer which could be funded by taxing luxury expenditures are some possibilities.

21 Jan 2013, 08.07 PM

Harshita V M

I agree with sharinggyan's last point. I think taxing luxury expenditure and reducing supply chain hassles are certainly good measures that can be encouraged to curb inflation while also giving impetus to growth measures like cutting interest rates. Perhaps if we can come up with more such ideas to curb inflation while interest rates are cut down then we can have a way of compensating the effects of lowering interest rates on the common man. I reassert here that growth is certainly essential, but any industrial growth at the cost of decrease in inflation would mean increase in growth figures on paper yet reduction in average standard of living and growth of poverty. This is because inflation will slowly reduce the value of savings of people which will also yield lower interests while the prices of essential goods will continue to rise.

21 Jan 2013, 09.36 PM

Abhinav

Inflation and growth are like parallel paths and never meet and as the Indian case is concerned the economic growth for the last few years has slowed down to the levels to 5-6 % and is expected to continue for this year too. Inflation on the other hand has remain consistently high to the levels of 7-10%. In the view of high Inflation RBI has increased interest rates to curb inflation but the results are not very encouraging and as interest rates have increased the growth has been further stalled. Learning from the cases of developed countries with low growth and low inflation, in my view developing country like India should opt for a higher growth as it may help us in the longer run , as it helps in generating more employment, reduction of poverty etc. The period of 2003- 2008 which saw India growing at a rate of 8% helped India make a mark in the international arena and its attracted lots of foreign investment. Moreover its better to earn something as an inflation level of 10% than earning nothing at a level of 7%.

23 Jan 2013, 11.53 AM

Vaibhav

India a country wherein for the past 1 year we have been rigorously facing this problem of growth vs inflation and this has led to a situation of stagflation. The problem with this kind of situation is it creates a vicious circle. The more inflation is tried to be curbed, it leads to a deterioration in growth, and as growth deteriorates it leads to more inflation. A very similar kind of problem was faced by Germany after World War 2. Germany at that point was facing inflation levels of around 20%. At that point of time Germany took long term measures to curb the inflation, which is to increase supply, rather than taking short term measures as taken by the RBI. It took Germany more than 5 years to stabilize but then the kind of measures it took has helped the country till date. Germany remains the strongest nation among all Euro nations. A similar kind of measure needs to be taken by the Indian policy makers along with the RBI. Recently it was seen that by way of decreasing subsidies on various commodities, especially diesel. But again the government took its foot back considering election is round the corner. Diesel still remains regulated. Due to high inflation figures industries do not look options for growing, and hence it raises fiscal deficit levels. (5.3% of GDP). Policies like GAAR, retrospective tax laws needs to be deferred as of now to motivate investor sentiments. Tax brackets should be modified to include more people rather than taxing the rich more. Reducing interest rates will help industries to grow and meet demand supply gap which will in turn help in curbing inflation. These policies will certainly help growth reach to 7-8% levels again and it will automatically reduce inflation levels.

24 Jan 2013, 12.03 PM

Ash

As has been pointed out by Vaibhav I believe that we need to avoid the vicious cycle of low growth and high inflation. Till date RBI has been bang on target with its tight Monetary policy and has been able to bring the inflation to 7-7.20% mark. Considering that India is a developing country and it is a post crisis global recovery scenario I believe that 7-7.5 % inflation is acceptable. Furthermore if we analyse inflation in our economy it is largely due to high food inflation which in turn is due to supply bottlenecks. Depreciating rupee, high interest rates and high import costs leading to high production costs, high fiscal deficits are other factors contributing to high inflation. In this scenario if RBI persists with its policy of tight monetary policy , it can be counter productive contributing to longer term inflation due to lower growth. hence i believe that RBI should ease interest rates by atleast 125 basis points which will boost investments leading to better supply chains and lower inflation. Increased economic activity will lead to increased government income and in turn help in fiscal consolidation which will eventually lead to lower inflation and higher growth trajectory.

25 Jan 2013, 08.43 PM

Ankur

Inflation affects every consumer of the state – poor, middleclass, rich everybody. A little inflation is good for growth because most consumers expecially middle class and rich are not much bothered about that and they do spend and buy items. In that situation, companies rake up high sales and the demand is also there. So upto some level, u can keep pushing for growth even if there is a small increase in inflation. But when inflation increases beyond a critical point (like it is now at 7.18%), then the demand automatically falls. People don’t have enough money to buy that much. Hence, then there would be no good in pushing for supply side measures to boost growth. Hence, curbing inflation should be the priority and bringing it down beyond a critical point should be the priority.

26 Jan 2013, 10.54 PM

Aditya

India with it's second highest population is one of the biggest markets the world. The only way to boost economy in the long term is to increase investment, both public and private, to make use of the market. This will materialize only if people are willing to spend. Hence the principle of following austerity measures to curb high inflation should be reconsidered looking at long term goals. The government needs to start spending more to promote growth that would attract investment and increase the money flow in the economy in the long run. Ofcourse, there is the problem of fiscal deficit that needs to be controlled to maintain the stability of economy. The government has already started working on its way by hiking the fuel prices to reduce the subsidy. More such measures should be brought so that govt. spending on developmental projects can be increased. One suggestion to the govt, could also be, introducing the slab system in fuel pricing just like electricity and income tax. Though it is relatively a long process it can provide a concrete solution of burdening the common man with high fuel price. The people also should be willing to bear the brunt of relatively high inflation for a few years to have a comfortable future. As time progresses, the supply side reforms would automatically reduce the inflation.

28 Jan 2013, 02.20 PM

Aditya

*Though it is relatively a long process it can provide a concrete solution for not burdening the common man with high fuel price*

28 Jan 2013, 02.22 PM

Harshita V M

We all seem to take for granted the idea that measures like reducing interest rate that are aimed at allowing greater investment, are sure to bring returns in the form of growth. But what if these measures to improve growth don't work? What if the investments made by the companies don't bring profits and increase in their revenue. These things depend on the management and strategy of the investing companies, and who is to say all the money that gets invested will lead to growth. Instead there is a possibility that there will be more liquidity, rising inflation that will reduce the value of the rupee, value of common man's savings will come down while at the same time the prices of essential commodities will be higher. Is it prudent to risk the safe life of the common man for the sake of probable growth? Also about the argument that cheaper retail loans would lead to higher spending, I would say, it would lead to higher spending by the rich who can afford to buy items priced so high, instead I would say if inflation is curbed, more common people will be able to spend instead. I believe measures to boost growth that involve some amount of risk, should be saved for a time when India has the ability to cope with failure without burdening the common man.

30 Jan 2013, 09.29 PM

Harshita V M

I would also like to mention that India is a country with 40% of the population below the poverty line. If our efforts to decrease this percentage is bearing little fruit, inflation will worsen this cause. I still think we first need to focus on ways of reducing costs like curbing the problem of hoarding and giving away the hoarded essential commodities at subsidized rates to the people who need them. Similarly other schemes already started for the betterment of the less advantaged sections of the society should be first implemented effectively. If these schemes are in place, then rate cuts and higher liquidity, higher investment or inflation will have less effect on the vulnerable sections of the society. Because after all growth does not mean just growth in gdp, growth is meaningful only if it is transformed into improved standard of living, reduced poverty, better infrastructure and living conditions for all sections of the Indian Society..

30 Jan 2013, 10.18 PM