INFLATION- A TAX ON THE GLOBALIZED INDIA

Swapnil Misra

MBA II sem

IIIT Allahabad

Every day when we wake up and see the newspapers, we read in the daily newspapers about a giant known as the ‘Inflation’. The rate of inflation in February 2010 was almost a two digit mark at about 9.89%. This figure is almost a whopping two digit number. This was the highest mark in the past 16 months. These high rates of inflation were driven by high prices of essential food items and increase in the price of fuel. This hike in fuel prices was due to the increase in excise duty on fuel which was announced in the budget 2010-11. As far as inflation of food items is concerned, it is the fact that if the prices of an item of luxury increase, then the economy is  not affected but, if the essential food items become expensive, then the whole economy is affected. There are various ways to measure inflation. The most common way is to measure it by using the wholesale price index. The wholesale based inflation  shot up 1.34 percentage points in February while it was 8.54% in the previous month.

According to the RBI’s projection for January 2010, inflation had to at a mark of 8.5% but it has already surpassed the mark and has reached almost two digit mark. It was almost 17.70% in february2010 for food items. Among the food items, the commodities in which there was the maximum increase in the prices were not gold or cars, but it were essential food items as potato, sugar, etc. Among these food items, prices of sugar, pulses and potatoes increased by 55%, 36% and 30% respectively.

There was a drastic increase in fuel prices also. The fuel price index shot up by over 10%. This happened because of increase in the excise duty of the fuel. Now this inflation has started acting as a virus which has started affecting the other areas as well. Since India is a managed economy, hence the central bank can control the situation and curtail the spiraling inflation.

 As every action has an equal and opposite reaction, hence RBI has taken measures by increasing the repo rate and the reverse repo rate, each by 25 basis points. It has signaled that it would reverse the easy monetary policy it was following till date in order to tame the inflationary pressures. Hence the prime aim of the central bank is to tighten the money supply in order to reduce the liquidity. As a result, the central bank increased the two rates, though it was expected that many other key rates like CRR would be changed. Repo rate stands for a rate at which banks borrow from RBI for short term. It has been changed by 25 basis points to 5% w.e.f. March 19, 2010. The Reverse Repo Rate stands for the rate at which the surplus cash of the banks is parked with the central bank. This ratio was changed to 3.5% from the existing 3.23% w.e.f. march 19.2010.  Earlier this year in January, 2010 RBI had increased the Cash Reserve Ratio(CRR) by 75 basis points to 5.75% in order to manage the liquidity of the system. Since there is an increase in the Repo and the reverse repo rates, hence the interest rates could be expected to increase in the economy. This could in turn reduce the liquidity of the system as the people will save more hence reducing the liquidity of the system.

Hence we can conclude that inflation is actually acting as a tax on the people which is certainly an expense in the globalized world.