MEASURES TO CONTROL INFLATION
We have studied above that inflation is caused by the failure of aggregate supply to equal the increase in aggregate demand. Inflation can, therefore, be controlled by increasing the supplies and reducing money incomes in order to control aggregate demand. The various methods are usually grouped under three heads: monetary measures, fiscal measures and other measures.
1. Monetary Measures: Monetary measures aim at reducing money incomes.
a) Credit Control: One of the important monetary measures is monetary policy. The central bank of the country adopts a number of methods to control the quantity and quality of credit. For this purpose, it raises the bank rates, sells
securities in the open market, raises the reserve ratio, and -adopts a number of selective credit control measures, such as raising margin requirements and regulating consumer credit. Monetary policy may not be effective in controlling inflation, if inflation is due to cost-push factors. Monetary policy
can only be helpful in controlling inflation due to demand-pull factors.
b) Demonetizations of Currency: However, one of the monetary measures is to demonetize currency of higher denominations. Such a measure is usually adopted when there is abundance of black money in the country.
c) Issue of New Currency: The most extreme monetary measure is the issue of new currency in place of the old currency. Under this system, one new note is exchanged for a number of notes of the old currency. The value of bank deposits is also fixed accordingly. Such a measure is adopted when there is an
excessive issue of notes and there is hyper inflation in the country. It is very effective measure but is inequitable because it hurts the small depositors the most.
2. Fiscal Measures: Monetary policy alone is incapable of controlling inflation. It should, therefore, be supplemented by fiscal measures. Fiscal measures are highly effective for controlling government expenditure, personal consumption expenditure, and private and public investment. The principal fiscal measures are the following:
a) Reduction in Unnecessary Expenditure: The government should reduce unnecessary expenditure on non-development activities in order to curb inflation. This will also put a check on private expenditure which is dependent upon government demand for goods and services. But it is not easy to cut government expenditure. Though economy measures are always welcome but it becomes difficult to distinguish between essential and non-essential
expenditure. Therefore, this measure should be supplemented by taxation.
b) Increase in Taxes: To cut personal consumption expenditure, the rates of
personal, corporate and commodity taxes should be raised and even new taxes should be levied, but the rates of taxes should not be so high as to discourage saving, investment and production. Rather, the tax system should provide larger incentives to those who save, invest and produce more. Further, to bring more revenue into the tax-net, the government should penalize the tax evaders
by imposing heavy fines. Such measures’ are bound to be effective in
controlling inflation. To increase the supply of goods within the country, the government should reduce import duties and increase export duties.
c) Increase in Savings: Another measure is to increase savings on the part or the people. This will tend to reduce disposable income with the people, and hence personal consumption expenditure. But due to the rising cost of living, people
are not in a position to save much voluntarily. Keynes, therefore, advocated compulsory savings or what he called ‘deferred payment’ where the saver gets his money back after some years. For this purpose, the government should float public 10ansJarrying high rates of interest, start saving schemes with
prize money, or lottery for long periods, etc. It should also introduce
compulsory provident fund, provident fund-cum-pension schemes, etc compulsorily. All such measures to increase savings are likely to be effective in controlling inflation.
d) Surplus Budgets: An important measure is to adopt anti-inflationary
budgetary policy. For this purpose, the government should give up deficit
financing and instead have surplus budgets. It means collecting more in revenues and spending less.
e) Public Debt: At the same time, it should stop repayment of public debt and postpone it to some future date till inflationary pressures are controlled within the economy. Instead, the government should borrow more to ‘reduce money
supply with the public. Like the monetary measures, fiscal measures alone cannot help in controlling inflation. They should be supplemented by monetary, non-monetary and non-fiscal measures.
3. Other Measures: The other types of measures are those which aim at increasing aggregate supply and reducing aggregate demand directly.
a) To Increase Production: The following measures should be adopted to increase production:
(i) One of the foremost measures to control inflation is to increase the
production of essential consumer goods like food, clothing, kerosene oil, sugar, vegetable oils, etc.
(ii) If there is need, raw materials for such products may be imported on preferential basis to increase the production of essential
(iii) Efforts should also be made to increase productivity. For this
purpose, industrial peace should be maintained through agreements with trade unions, binding them not to resort to strikes for some time.
(iv)The policy of rationalization of industries should be adopted as a long-term measure. Rationalization increases productivity and production of industries through the use of brain, brawn and bullion.
(v) All possible help in the form of latest technology, raw materials, financial help, subsidies, etc. should be provided to different consumer goods sectors to increase production.
b) Rational Wage Policy: Another important measure is to adopt a rational wage and income policy. Under hyperinflation, there is a wage-price spiral. To control
this, the government should freeze wages, incomes, profits, dividends, bonus, etc. But such a drastic measure can only be adopted for a short period and by antagonizing both workers and industrialists. Therefore, the best course is to link Increase in wages to increase in productivity. This will have a dual effect. It will control wage and at the same time increase productivity, and hence production of goods in the economy.
c) Price Control: Price control and rationing, is another measure of direct control to check inflation. Price control means fixing an upper limit for the prices of essential consumer goods. They are the maximum prices fixed by law and anybody charging more than these prices is punished by law. But it is difficult to administer price control.
d) Rationing: Rationing aims at distributing consumption of scarce goods so as to make them available to a large number of consumers. It is applied to essential consumer goods such as wheat, rice, sugar, kerosene oil, etc. It is meant to stabilize the prices of necessaries and assure distributive justice. But it is very
inconvenient for consumers because it leads to queues, artificial shortages,
corruption and black marketing. Keynes did not favor rationing for it “Involves a great deal of waste, both of resources and of employment.”
Conclusion: From the various monetary, fiscal and other measures discussed above, it becomes clear that to control inflation, the government should adopt all measures
simultaneously. Inflation is like a hydra-headed monster which should be fought by using all the weapons at the command of the government.