7.4           ndian     onom
     that’s why they start purchasing at higher prices                      aspects of price management of this
     also. If this has not been the reason, people would                    category.
     have cut-down their consumption (i.e., overall                  (ii) As a cost side measure, governments may
     demand) to the level of their purchasing capacity                      try to cool down the price by cutting down
     and the aggregate demand of goods would have                           the production cost of goods showing
     gone down. But this does not happen. It means                          price rise with the help of tax breaks—
     every cost-push inflation is a result of excessive                     cuts in the excise and custom duties (as
     creation of money—increasing money flow or                             happened in June 2003 in India in the
     money supply.                                                          case of crude oil and steel8). This helps as
           For the monetarists, a particular level of                       a short-term measure. In the long-term,
     money supply for a particular level of production                      better production process, technological
     is healthy for an economy. Extra creation of money                     innovations etc., are helpful. Increasing
     over the same level of production causes inflation.                    income of the people is the monetary
     They suggested proper monetary policy (money                           measure to avoid the heat of such
     supply, interest rates, printing of currencies, public                 inflation.
     borrowing etc.), to check situations of inflationary           (iii) The governments may take recourse to
     pressure on the economy. Monetarists rejected the                      tighter monetary policy to cool down
     Keynesian theory of inflation.                                         either the demand-pull or the cost-push
                                                                            inflations. This is basically intended to cut
     3. meAsures to check inflAtion                                         down the money supply in the economy
                                                                            by siphoning out the extra money (as
     From the above-given reasons for inflation
                                                                            RBI increases the Cash Reserve Ratio
     and the measures to control it, which
                                                                            of banks in India)9 from the economy
     of the measure the governments of the world
                                                                            and by making money costlier (as RBI
     should apply in their policymaking? In practice,
                                                                            increases the Bank Rate or Repo Rate in
     governments around the world distance themselves
                                                                            India)10. This is a short-term measure. In
     from this debate and have been taking recourse
                                                                            the long-run, the best way is to increase
     to all possible options while controlling inflation.
                                                                            production with the help of the best
     The governments resort to the following options                        production practices.
     to check rising inflation:
                                                                      Again, this measure does not work if the price
            (i) As a supply side measure, the                   rise is taking place in items of everyday use such as
                 government may go for import of goods          salt, onion, wheat, etc. (because nobody purchases
                 which are in short-supply—as a short-          such goods by borrowing from the banks). This
                 term measure (as happened in India             measure helps if the prices are rising due to extra
                 in the case of ‘onion’7 and meeting the        demand of cement, iron and steel, etc.
                 buffer stock norm of wheat). As a long-
                 term measure, governments go on to                8.    As per the Economic Survey, 2003–04, p. 90.
                                                                   9.    As the CRR for banks was revised upward to 6.5 per
                 increase the production to matching the
                                                                         cent by the RBI in its Credit and Monetary Policy for
                 level of demand. Storage, transportation,               April 2007 onwards and again increased to 7 per cent
                 distribution, hoarding are the other                    in the Review, July 31, 2007.
                                                                  10.    As the RBI increased the Repo Rate to 7.75 per
         7.    As per the Economic Survey, 1997–98, Ministry of          cent in its Credit & Monetary Policy announced on
               Finance, GoI, N. Delhi, p. 89.                            March 31, 2007.