How to Control Inflation

How to Control Inflation

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Most of the time, the various methods for controlling inflation fall into three categories: fiscal measures, monetary measures and some other methods, as discussed below:

1. Monetary Measures: The goal of monetary policies is to cut money incomes and this will include:

(a) Credit Control: One of the significant financial measures is money related strategy. The country's central bank uses a variety of strategies to regulate credit quality and quantity. It adopts a number of selective credit control measures, such as raising margin requirements and regulating consumer credit, as well as regulating the repo rate, sells securities on the open market, and raises bank rates for this purpose. If cost-push factors are the cause of inflation, monetary policy may not be able to control it. Because of demand-pull factors, monetary policy can only be helpful in controlling inflation.

(b) Currency Demonetisation: Demonetizing higher-denominated currency is a monetary measure. When a country has a lot of black money, this kind of measure is usually taken.

(c) Issuing New Currency: The issuance of new currency in place of the existing currency is the most extreme monetary measure. One new note is exchanged for a number of old currency notes under this system. In line with this, bank deposits are also fixed in value. When a country experiences hyperinflation and excessive note issuance, such a measure is taken. But this is not always equitable as this may damage the small time depositors the most.

2. Fiscal Measures: Inflation cannot be controlled by monetary policy alone. As a result, monetary measures should be added to it. Fiscal measures are very good at controlling spending by the government, spending on personal consumption, and private and public investment. The essential fiscal measures are elucidated here:

(a) Reduction within Unnecessary Expenditure: To reduce inflation, the government should cut back on spending on things other than development. Private spending, which is influenced by government demand for goods and services, will also be curtailed as a result of this. But it's hard to cut back on government spending. Although this measure is always appreciated, it becomes difficult to differentiate between expenditures that are essential and those that are not. As a result, taxes should be added to this measure.

(b) Increase the Taxes: Rates of personal, corporate, and commodity taxes should be increased, and even new taxes should be imposed, in order to reduce the expenditure on personal consumption. However, tax rates should not be so high as to discourage saving, investing, and production. Rather, the duty framework ought to give bigger motivating forces to the people who save, contribute and create more. Additionally, the government ought to impose substantial fines on tax evaders in order to increase tax revenue. Inflation will almost certainly be controlled by these measures. The government ought to raise export duties and reduce import duties in order to boost domestic supply of goods.

(c) Increasing the Savings: The people's increased savings is yet another measure. People's disposable income and, consequently, personal spending will likely decrease as a result. However, due to the rising cost of living, individuals are unable to save much on their own. As a result, Keynes advocated mandatory savings or what he referred to as "deferred payment," in which the saver receives their money back after a few years. In order to accomplish this, the government ought to offer public loans with high interest rates, initiate savings programs utilizing prize money, hold long-term lottery draws, etc. It should also include mandatory provident fund and provident fund-cumulative pension plans. All of these measures are likely to reduce inflation and increase savings.

(d) Surplus Budgets: Adopting a budgetary policy that discourages inflation is a crucial step. The government ought to abandon deficit financing in favor of surplus budgets for this purpose. It means spending less while earning more money.

(e) Public Debt: At the same time, it should stop paying off the public debt and put it off until after inflationary pressures in the economy are under control. Instead, the government ought to borrow more money to reduce public money supply. Fiscal measures, like monetary measures, cannot control inflation on their own. Non-fiscal, non-monetary, and monetary measures should be added to them.

3. Other Measures: The other measures are those that directly aim to reduce aggregate demand and increase aggregate supply.

(a) Increasing Production: This will entail the following:

(i) Increasing the production of essential consumer goods like food, clothing, kerosene oil, sugar, vegetable oils, and so on are some of the potent ways to regulate inflation.

(ii) If there is need, raw materials for such products may be imported on preferential basis to increase the production of essential commodities.

(iii) Efforts should also be made to increase productivity. For this purpose, industrial peace should be maintained through agreements with trade unions, binding them not to resort to strikes for some time.

(iv) The long-term strategy of industry rationalization ought to be implemented. Through the use of brain, muscle, and steel, rationalization increases industries' productivity and output. (v) Any assistance, including the most recent technology, raw materials, financial support, subsidies, and so on should be made available to various consumer goods industries to boost production.

b) A Reasonable Wage System: A rational wage and income policy is an additional important step. Wage inflation spirals under hyperinflation. The government ought to put a freeze on wages, incomes, profits, dividends, bonuses, etc. in order to control this. However, because it is likely to cause conflict between workers and industrialists, such a drastic measure can only be used for a limited time. As a result, the best course of action is to link an increase in productivity to an increase in wages. There will be two effects from this. It will maintain wage control while also increasing productivity and, as a result, the economy's output of goods.

c) Control of Costs: Other direct control measures to stop inflation include price control and rationing. Setting a price ceiling for essential consumer goods is called price control. They are the legal maximum prices, and anyone charging more than these prices is subject to legal sanctions. However, price control administration is difficult.

d) Restriction The goal of rationing is to spread out the use of scarce goods so that a large number of people can get them. Oil, wheat, sugar, rice, kerosene oil, and other essential consumer goods are included in this application. Its purpose is to ensure distributive justice and stabilize the prices of necessities. However, it creates queues, artificial shortages, corruption, and black marketing, all of which are extremely inconvenient for customers. Keynes opposed rationing because it "involves a great deal of waste, both of resources and of employment," according to his theory.

Conclusion - It becomes clear from the various monetary, fiscal, and other measures discussed above that the government should implement all of them simultaneously to control inflation. Like a hydra-headed monster, inflation should be combated with every weapon in the government's arsenal.