Inflation Control Procedures

Inflation Control Procedures

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Inflation must be kept under control at a reasonable level. Unchecked inflation can lead to hyperinflation. In order to control inflation, a mix of monetary, fiscal, and other policies must be used.

1) Monetary policies - An rise in the money supply without an increase in the overall supply of products and services produces excess demand, which leads to inflation. Monetary authorities may use monetary instruments to raise the cost of credit without decreasing the money supply. The country's central bank use both quantitative and qualitative tools to achieve this goal.

                i)Quantitative Instruments - are Bank rate, repo rate, open market operations, CRR, SLR, and selective credit restrictions. Rise in the bank rate, repo rate, CRR, SLR, and open market selling of securities may render money more expensive, lower the amount of money in circulation, and limit commercial banks' capacity to issue credit.

                ii)Selective Credit restrictions: These methods include margin necessities, consumer credit control systems, directives, credit rationing, and any other tool that allows for a selective approach to credit supply. Selective Credit regulations promote vital operations while discouraging Demand for Credits for not essential uses.

(2) Fiscal measures - Monetary measures alone cannot reduce inflation. They should be backed up by fiscal measures. The government tricks the budget to minimise both private and governmental spending in order to keep demand for products and services in check and to stimulate the production of critical commodities. Fiscal tools include taxation, public borrowing, and public spending.

                i) Direct and indirect taxes are applied to lower people's disposable income.

                ii) borrowing by the government can be used to lower the amount of money held by the public.

                iii) Mandatory saving or any other type of forced saving system, as well as postponed payment, are some methods for reducing excess demand.

                iv) Public expenditure happens to be the primary source of money injection into the economy. Although it can be challenging to reduce government spending, the government should make every effort to avoid any wasteful spending.

(3) Administrative (direct) measures - Direct measures include price restrictions or price ceilings, particularly for critical goods. The public distribution framework is handled through the channels of rationing and fair pricing stores. Imports of critical goods may be necessary to sustain supply. Since 2010-11, the following significant administrative steps have been implemented to curb inflation, particularly food inflation.

                (i) Non-basmati rice, edible oils, and pulses are prohibited from being exported.

                (ii) The Forward Market Commission has stopped futures trading in rice, urad, and tur.

                (iii) The levy obligation on all imported white refined and raw sugar has been eliminated.

                (iv) The minimum export cost was utilised to control onions and basmati rice exports. Milk powder export is prohibited. The government regulates onion exports in order to keep prices stable.

In addition to the steps listed above, the government has prioritised the PDS, distribution of critical goods at below-market rates thru state public-sector units (PSUs), anti-hoarding activities, and supply chain efficiency. Measures to regulate inflation by any means are doomed to fail. A wise mix of all strategies is required for success.