Why should the government control inflation?

January 21, 2010

A labourer pulls a plastic sheet to cover sacks of paddy from rain at a grain market in Chandigarh January 13, 2010. REUTERS/Ajay VermaThe ‘reform agenda’ understood as ‘market-oriented reform’ or giving more space to market mechanism in food and fuel economy seems to have been held up.

The government can not be seen to be doing away with subsidies just as prices are up. Its hand is stayed for now.

But is that enough for say the gross national happiness?

Food and fuel inflation has been in the news for a while.

The government has no short-term control over supply side issues causing price rise like a bad monsoon leading to a low harvest or floods, but it can control the rising demand by reining in liquidity.

It is guarded on doing so for fear of stifling growth.

Is that fair to the poor?

Prolonged inflation redistributes income in favour of the rich (who possess non-monetary assets) as the value of money, whatever little of it may be held by the poor, goes down.

In the text-book understanding of things, it should be bad politics in a country still debating the definition of the “poverty line”.

High minimum support price for agricultural commodities is one of the reasons for food inflation alongside bad harvest.

By the time food inflation can peter out, in a way, the rich farmers and perhaps the city dwellers would have gained at the expense of the poor farmers and the landless in the countryside.

For whom is the growth figure important?

Some say that the number of Indians who invest in the stock market is miniscule and that should not deter the government from going ahead with welfare-oriented policies.

But it is also true that many times the number of stock investors is indirectly dependent on the health and wealth of the companies traded on the stock market.

Hence, the argument for ignoring the stock indices and ploughing ahead with welfare-oriented policies like universal public distribution system (which will surely increase the food subsidy bill) is partially rhetorical.

It is said that to better distribute the pie it needs to be grown in size.

Yet when was the last time you heard a politician in the government speak on the definition of poverty the government uses rather than what the growth figures look like this week?

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