The farmer protests reflects India’s money illusion problem…

Interesting piece by Niranjan. He says the recent farmer protests due to fall in prices of agri goods despite a record agri production reflects nothing but money illusion. It is the old problem where people attribute rise in prices to rise in well-being.

The recent farmer protests in some parts of the country throw fresh light on an old economic problem. People think in nominal rather than real terms. Price changes matter. The paradox of farmer protests when farm output is at record levels is less puzzling once we take falling food prices into account. It is the nominal rather than the real trend that is hurting farmers. It is useful to remember that two of the biggest movements launched by M.K. Gandhi were timed with the deflation in farm prices after World War I and the Great Depression across the world.

……

The recent drop in Indian inflation provides an excellent opportunity to think more clearly on the old problem of nominal versus real variables in an economy. It can also offer some clues about why this does not “feel” to be an economy growing at around 7%. This has been a common complaint

The answer could be that human psychology—or feeling of confidence or pessimism—is deeply affected by the trend in prices rather than in output alone. Indian workers, companies, investors, savers are so used to high inflation that lower nominal numbers because of the drop in inflation is a fact that they have psychologically not adjusted to. The Indian economy is not yet out of the woods but the money illusion is making the situation seem worse than it is. Think about it.

Hmm…

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s


%d bloggers like this: