Inflation

Everyone seems to be concerned, rightly, about inflation. BL has a table giving prices of consumer goods over the last three years - where price changes look less threatening.



Reason. BL reports:

A combination of several factors has helped keep consumer goods prices under check over the past three years.

As Mr R. Subramaniam, Managing Director of discount retail chain Subhiksha explains, most categories have been inflation resistant due to stiff competition be it in shampoos or tea. "Combined with excise and income tax sops offered for manufacture in certain locations such as Uttaranchal, the North-East and Himachal, there has been significant cost savings for manufacturers also — so it is not as though their bottomlines have suffered. Also in specific categories emergence of new competition, for example in biscuits a reinvigorated Parle and a rampaging ITC have also been an issue."

Food prices are still a major concern, and everyday you see reports of government trying to do something about it by banning exports, lowering important prices, forcing people to sell them at certain prices, trying to ban future trading etc... BL has another piece - an interview with Mr Ramkishen S. Rajan, Associate Professor, School of Public Policy at the George Mason University, US - suggesting that targeted subsidies could be better solution here - but distribution infrastructure and fiscal deficit might come in the way.

On how inflation is supply-driven.

Inflation in India is also supply-driven in the sense of rising food prices. However, conventional monetary policy instruments are best used for demand-side inflation. Developing countries tend to use direct measures such as price controls, prohibiting exports of foodstuffs or reducing import tariffs on such items.

On the effectiveness of these measures.None of these are advisable policy options as they have distorting effects on the macro economy.

What are the options, therefore?

Directed and targeted subsidies to the least well-off would be preferable, though admittedly in the Indian context it is unclear that such a policy option will work effectively both because of the inefficiencies in delivery as well as the large consolidated fiscal deficit (which in turn highlights the need to take action on this front). Over the long term, focus must also be on systemic reforms to agriculture so as to overcome inefficiencies and reduce vulnerability to monsoon conditions.

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