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Kerala PSC Indian Economy Book Study Materials Page 170Book's First Page
7.6 ndian onom prices up due to extra-creation of money during other VarIants of InflatIon the process. Other than the three broad categories we analysed above, some other variants of inflation are also DeflAtionAry gAP considered by governments in their policymaking: The shortfall in total spending of the government (i.e., fiscal surplus) over the national income i. bottleneck inflAtion creates deflationary gaps in the economy. This is a This inflation takes place when the supply falls situation of producing more than the demand and drastically and the demand remains at the same the economy usually heads for a general slowdown level. Such situations arise due to supply-side in the level of demand. This is also known as the hurdles, hazards or mismanagement which is also output gap. known as ‘structural inflation’. This could be put in the ‘demand-pull inflation’ category. inflAtion tAx Inflation erodes the value of money and the ii. core inflAtion people who hold currency suffer in this process. This nomenclature is based on the inclusion or As the governments have authority of printing currency and circulating it into the economy (as exclusion of the goods and services while calculating they do in the case of deficit financing), this act inflation. Popular in western economies, core functions as an income to the governments. This is inflation shows price rise in all goods and services a situation of sustaining government expenditure excluding energy and food articles. In India, it at the cost of people’s income. This looks as if was first time used in the financial year 2000–01 inflation is working as a tax.23 That is how the when the government expressed that it was under term inflation tax is also known as seigniorage. control—it means the prices of manufactured It means, inflation is always the level to which the goods were under control.22 This was criticised by government may go for deficit financing—level of experts on account of excluding food articles and deficit financing is directly reflected by the rate of energy out of the inflation and feeling satisfied inflation. on the inflation front. Basically, in the western It could also be used by the governments economies, food and energy are not the problems in the form of prices and incomes policy under for the masses, while in India these two segments which the companies pay inflation tax on the are of most vital importance for the common salary increases above the set level prescribed by people. the government.24 other Important terms inflAtion sPirAl An inflationary situation in an economy which inflAtionAry gAP results out of a process of wage and price interaction The excess of total government spending above ‘when wages press prices up and prices pull the national income (i.e., fiscal deficit) is known wages up’25 is known as the inflationary spiral. It as inflationary gap. This is intended to increase is also known as the wage-price spiral. This wage- the production level, which ultimately pushes the 23. Stiglitz and Walsh, Economics, p. 511. 22. Ministry of Finance, Economic Survey, 2000–01, (New 24. Penguin Dictionary of Economics. Delhi: Government of India, 2001). 25. Ibid.