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.