Friday, April 27, 2012

India's inflation rate will stay at 6-7%

There is little chance of India's inflation rate going down in the medium term. If anything, the rate may go up. A rate of 6-7% need not be feared. It is only a very high rate of inflation (at least above 10%) that imposes significant efficiency costs.

The social consequences are not very disruptive, as it appears rural and urban workers, both in the organised and unorganised sectors, are having wage increases that are above the inflation rate. The losers would be pensioners, the unemployed and foreign purchasers of Indian goods (to the extent that rupee depreciation does not offset price increases). Trying to reduce the inflation rate at this point would mean a growth rate of below 7%- and that would be psychologically damaging to Indian and foreign investors. So the RBI was right to cut its reference rate earlier this month.

More in my ET column, Higher inflation is here to stay. 

2 comments:

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Krishnan said...

I have never understood why it is OK to lower the value of money as a function of time. Are people happier paying ever so higher prices for the same goods? Does someone feel "richer" because they now pay MORE money for the exact same goods? Why is 6 to 7 percent some magical number? What does happen at 10% or above? Can people actually sense the difference between 6% and 10%? Will they not feel "richer" if they have to pay MORE for the same goods? that is 10% as opposed to 6%?

No, I cannot accept the fact that we somehow magically get growth because we can print money (piece of paper). Yes, there are many who think the "paper" is worth whatever it says and may not understand that the powers that be can magically create money. I have heard Paul Krugman talk about how it is OK to have a "small" inflation (Krugman rarely makes any sense, even as he tries to use Milton Friedman's ideas on monetary policy).

I do see that if Government magically creates money out of thin air, there will be some who may be fooled - but as more money chases fewer goods, the jig will be up and people will know that there is nothing behind the paper.

Yes, we must have a medium of exchange - something better than a barter. But when Government has a monopoly on printing money and gets reckless, we are helpless (and Governments almost always get reckless and irresponsible).

After WWII, in the US, Government spending went down significantly - and the economy grew like crazy - even as soldiers returned to find work - Keynesians imagine that growth comes from Government printing money - the 1970's in the US proved that inflating the economy can only lead to misery - higher inflation and higher unemployment - Governments taking trillions of dollars away from the private sector does not lead to growth but to a burden of debt that has to paid sometime. In the fairy tale world of Paul Krugman - Governments can borrow indefinitely because "we owe it to ourselves" - Krugman used to be an economist, today he is just a sorry human being who spouts crazy things and refuses to see anything other than a few inches off his face and insults anyone who dare challenge him.