Inflation: n00b’s guide


I went to vegetable markets after a real long time. Though I never felt the heat of inflation I was indeed shocked to see the prices. Just like all other government facts and figures I had thought that 7+ inflation wouldnt affect life of common public.  coriander leaves were now selling for Rs 15 instead of Rs 5 before.  Eggs were Rs 4 up from the last time I bought them.

Certainly the inflation has affected our lives very badly. And the things are only going to worsen from here. Economy and nature that maintain a perfect balance always. Nature does so because of Law of Conservation of Energy and Economics does so because of  the same law can be approximated to money.

Here are some Myths , causes, prevention and consequences of/about Inflation.

Definition

Inflation can be defined in may ways. A simple definition can be that the decrease in time value of money. As the time progresses the value of currency in terms of things it can buy goes down. Inflation rate of 10% would mean that an object that cost Rs 100 today will cost Rs 110 after 1 year. Rs  200 after 10 years (without considering compounded depreciation)

Myth

Inflation is caused by lack of money among public. This is a wrong belief.  Inflation results from increasing purchasing power of the people. When people have more money they tend to buy more. When they buy more demand increases. The fundamental law of Economics is that prices are directly proportional to demand. As the demand increases there is a great pressure on production, as the production can meet the demands the prices go on increasing.

Cause

With Indian markets going global has created ample opportunities for Indians. We have also seen great entrepreneurs born in India. This has resulted in may people going rich. People in software industry must have realized this. With many people going rich has seen a great increase in demand for all the items , from food to automobiles and petroleum prices.

Cause

Liquidity is another factor that contributes to inflation. We see so many banks landing loans so easily to the people. A person earning 3 lakh per annum easily gets 10 lakh loan on 240 installments. This suddenly increases cash in hand for that person. The money he would have spent in future comes in his hand in present. Hence he starts buying things which he cant afford under normal circumstances.

Consequence 

Inflation can not be avoided. There is hardly any country in world that has negative inflation rates. Since the populations and quality of life is only increasing inflation can only rise. Inflation has a very deep affect of economy and people.

Inflation rates of below 2.5 are considered as best. Such an economy is best and people are happy with the prices. They get enough to eat and enjoy. They can save money which when properly managed by government can result into further prosperity for the nation.  E.g. Japan with 0.2%

Inflation rate of 5% is considered OK. But things need to improve. Like on all fronts India’s performance was always mediocre falling somewhere between 5-6%. However because of tremendous growth potential it was undermined.

Inflation rate of above 5% is alarming. It has many implications. It means people are unhappy and not getting what they really want. As the rate goes up unrest among public increases which can finally lead to anything including a civil war. Noone wants to invest in such a country. Rate above 5% need prompt action from government.  E.g. Zimbabwe 1033% Yes its one thousand and thirty three percent. The currency has negligible value and people would rather believe in good old barter system. Iraq 53% because of war conditions.

Prevention

The possible measures to prevent or control inflation? Its simple dont allow people to haev money with them deprive them of money and the demand will go down. How to deprive them of money? The government terms it as ‘Monetary Policy’ it actually means High interest rates (Loans), Speed breakers for economic growth, high taxes for new rich people, rationing of items that have high demand etc. etc.

All these measures suggest that the economy will get a kicking where it hurts the most hence no one invests in such a country. Which results into lower stock markets, increase in unemployment. So its like calling a recession. Finally it meets a point where people are left with no money or just enough to meet the demands. That is when the government starts loosening the grip and again things might start upwards. ‘Might’ because not necessarily the economy might attract investors after the inflation is controlled. It takes many years to gain confidence.

What can India do?

India in very much dependent of Petroleum Exports. So the prices are very much on Dependant on them. Petroleum prices will never go down here from future. The solution is very very difficult. One possible solution is to compensate the deficit caused by petroleum by increasing productions in other areas such a agriculture and engineering. India’s agriculture is growing at 4% or below and there are no hopes of it improving instead this year the agriculture has costed us around 71k crores.

Finding alternative sources of energy is the best solution in my opinion. A good breakthrough in technology can change things upside down. India certainly cant do this on its own. Only US can help India.

Put taxes on Rich people so the demand is curbed. I am sure the government will resort to this alternative. The only reason why they have not done this is because of pending elections. Suddenly they will give a blow to the rich class by increasing different sort of taxes manifold.  By rich I mean the service class people like IT engineers.

Rationing is another thing that will come in future. Especially for fuel. Though it will be tough to implement, it can be an option. You might have to take a license to buy petrol for your car.

Increases interest rates on loans. The thing that government has already done.

Fool people. The approach the goverment is most likely to take. Alter the data to make people believe that things are alright. Control petrol and food prices by making PSU’s bleed and giving things like loan waivers and subsidies.

Surrender and play the blame game . Government will do this when they reach the dead end. Before jumping off the cliff they will kick our butts first. They will take all nonsense decisions in panic. Will surrender to IMF, world bank or the US. Will depreciate value of currency, chunk out money from Monitory fund, Ban several goods. Increase taxes manifold.

If you think I am exaggerating please note that the India has already done this in past.  Indian even had to sell the gold with Reserve bank of India.

One thought on “Inflation: n00b’s guide

  1. Hey thats a nice article.
    The so called economist PM and FM are behaving like idiots.

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