Virtues of a monster

Inflation is most often a planned phenomenon. it has several benefits and therefore it is not a total evil and is a desirable device in hand of rulers. But this device is to be dealt very delicately otherwise it will take no time in turning into a monster.

A moderate level of inflation helps a country to meet the growth targets. And this is in line with this that the RBI has expressed it’s willingness to favour the 5-year’s inflation target set in 2016.  the retail inflation in India should be kept at 4% with an upper and lower limits at 6% and 2% respectively. Though Mint (daily) had earlier hinted the govt may reset the target at 5% to help the economy recover fast.

Let us understand the virtues of this monster if kept under control. An inflation is much better than a deflation. Why? Because in case of deflation (falling price) – 1. People would prefer to wait for purchase and so the whole economy would reel under lack of demand. 2. The real biting of EMIs on the limited monthly earning of a person will get deeper with each successive month which in normal circumstances get gradually tapered off due to inflation.

You may be surprised to know that as per the Phillip Curve the rise in inflation lowers unemployment rate at least to a certain extent. This is because the employer is able to reward an efficient worker with increment in wages without any real impact on his financial burden and very tactfully he is also able to keep the under-performing worker plausibly at same level of wages (which in real term has been lowered by inflation) without any hoo-ha.  

And the icing on the cake is that the export activities are automatically encouraged as the exporters would be able to get more rupees for a dollar earned after inflation. So the debt for export work he took in rupees can be easily repaid now. 

Though if administered imprudently inflation may make the domestic economy uncompetitive on global scale as the global traders may flinch to clinch a deal with a  country with unstable or falling currency. Moreover a hard-earned saving of middle-class loses sheen with each dose of inflation as it's valued erodes away gradually. Also, a daily-wage workers bear the brunt of rising prices the most as there may be a time-lag before their wage-rise and the price rise already happened.

We believe that the RBI and other authorities are thinking for an inflation rate where it is helpful for all of us.

(Author- Hemant K Das)