Inflation is always an Indian phenomenon

It is always good to go back to history. I had written earlier what would Ricardo do if he was granted a wish (realign trade theories with empirical work).

Now I want to add on to the famous Milton Friedman saying –Inflation is Always and Everywhere a Monetary Phenomenon“. It can be added that “Inflation is Always and Everywhere a Indian Phenomenon”.

The inflation (based on WPI) has increased to 7% for the week ended 22 March 2008. The inflation has been rising every week. The annual rate of inflation, calculated on point to point basis, stood at 6.68 percent for the week ended 15 March 2008 and 5.92 percent for 8 March 2008.

I have always pointedto the rising food prices in the world economy and the possibility of rising inflation in the economy. The central banks have been ignoring the inflation signals (in US, UK, Canada) but few Central Banks are concerned (India, Australia, New Zealand). This has divided the central banks in 2 camps – one lowering interest rates and two rising/high interest rates. This is surprising given the fact that inflation rising is a global phenomenon.

It actually points to an irony in India – the food prices are rising and farmers are dying. The reason is lack of reforms in the real economy and more so in rural economy. There have been suggestions for a longtime but nothing has been done. There are bottlenecks in all possible areas.

The experts might again blame the RBI but clearly the inflationary pressures are due to two points- global crisis in agriculture and supply side issues in India. The Central Bank can only manage the demand and with moderating growth/demand we should see moderating inflation. But inflation is actually rising and is expected to be that way.

It is time we get big reforms in the real economy and remove the bottlenecks. Most likely, the measures taken now will be short-term in nature and will again revisit Indian economy (it does revisit many a times). Hence the addition- Inflation is Always and Everywhere an Indian Phenomenon.

Addendum:

Here is an excellent paper from FAO on the subject.

2 Responses to “Inflation is always an Indian phenomenon”

  1. Aseem Naphade Says:

    Wow! You have written a superb article on the same topic, this is what i wrote in response to your valuable comments.

    “I see, i was under the assumption, that most of Keynes contribution was refuted by Friedman, anyways thanks for your comments, i have made the necessary changes in the article, as far as stagflation is concerned, yes thats actually an extreme case, it may not really happen. India will definitely continue to have a a satisfactory if not good growth rate, due to many factors one of them being the huge demand of goods and services from ever increasing the population. However we have in recent times experienced jobless growth as this article also reveals http://timesofindia.indiatimes.com/articleshow/1930668.cms, therefore merely maintaining 8% growth may not be enough, it has to create jobs and at the same time economic inequalities have to be minimized(but i doubt whether thats a function of growth). “

  2. rahul Says:

    this govt. is just basking in the glory of GDP growth in which they have no role to play,..they aren’t doing anything to nab the hoarders,black-marketers which has resulted in sky-rocketing of basic consumer goods,now the RBI will increase the CRR which will hurt people who have home loans thus furthur reducing their purchasing power.

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