Curbing Inflation Versus Promoting Growth - A Macro Economic Dilemma
My notes in an attempt to make sense out what is happening between what RBI thinks and what Industry thinks...
I remember my Macro Economics Prof telling
us that for an economist it is always difficult to make a choice between
"Curbing Inflation" and "Promoting Growth". This can be
seen in full colors in what is happening these days in the economic landscape
of India.
In an ideal world, improving the
output is always better and leads to inclusive growth, however in practical world
this process is slow. We cannot improve the output of economy overnight.
However, we should also not kill the means of increasing the output as well.
RBI/Govt is under huge criticism that
their vision is only one sided. Their means of curbing inflation is by monetary
policy of controlling interest rates. The idea is that if there is less money
in market, the demand will fall and hence the inflation will fall. This would
be a good move if the inflation is only demand pull; however the inflation
which we see today is a complex combination of demand pull and cost pull.
There are more chances that increasing the
rates would lead to industrial growth slowing down (which is already beginning
to happen). This in turn would hit the economy from two angles.
- The economy slows down, growth slows down, supply slows down.
- Demand slows down.
This is a recursive phenomenon which ultimately leads
the economy into recession, which will be based on what will fall more.
The experts always say that if inflation exists, but output/economy is growing at good pace, then it is
actually good for economy in long run. This is always a difficult, painful and a little
extended path to start off with, but would lead to an inclusive growth.
However still, inflation has always been a
sensitive issue for the government. The reason for this is more to do with
Social/Political environment. None of the parties are willing to sacrifice the
short term gains, which is the vote bank. None of the political parties are
going ahead and educating the masses that we need to live with inflation for
some time before good economic measures bear some fruits.
I do not have the knowledge and the
numbers which the government economists and statisticians have.
The need of the hour is to look at those numbers and decide how much
inflation can we withstand and then devise policies to grow the economy in
parallel instead of taking a short cut route. The government and
political parties need to give support to the economists to come out
with policies which are right for the economy.
