FINANCIAL ECONOMICS
India Inflation Explained
Madhusudan Raj, Alumnus, Ludwig von Mises Institute Auburn, Alabama, USA 5/18/2011 12:05:26 AM
In this crisis ridden world, economies around the world are experiencing high bouts of inflation and India is no exception to that. Indian economy is facing the effects of severe inflation in the form of rising food and energy prices. Indian government is either clueless about the cause of this inflation or is pretending to be clueless to fox the people from seeing the true cause of this rise in prices. Moreover, it is trying to divert everyone’s attention from the true cause of inflation by creating scapegoats like consumers (high demand), hoarders, speculators, food drought etc. This is an age old trick which all governments use to fool its populace when it embarks on the inflationary path in full speed.
The reason there is double digit inflation in India (and around the world) is this same government money printing process worldwide through its central banks, especially printing by US federal reserve i.e., the so-called ‘quantitative easing’ program (QE1, QE2 and soon to be announced QE3, QE4 and so on).
Fallacies
Since the beginning of recent financial crisis in 2008, Indian government through RBI is printing and injecting gargantuan amount of money in the economy. Here are the evidences:
1. Stimulus package 1: Newspaper, The Hindu (A. Dasgupta, 2008) reported that, unveiling the much-awaited stimulus package to shore up various sectors of the economy from the global downturn, the government on Sunday effected an across-the-board four percent cut in Cenvat to bring down the prices of cars, cement, textiles and other products, and earmarked an additional Rs. 20,000 crore for infrastructure, industry and export sectors for the current fiscal.
2. Stimulus Package 2: Indiaserver.com (Indiaserver.com, 2009) reported that, in less than a month since the UPA government announced a Rs 32,000 crore booster dose for the slowing economy, it came out with a more comprehensive and detailed stimulus package valued at over Rs. 20,000 crore. Montek Singh Ahluwalia, Deputy Chairman, Planning Commission announced the “Round II Package”, the last of this fiscal, focusing on stressed sectors like non-banking finance companies, real estate, infrastructure and small and medium businesses.
3. Stimulus Package 3: Finance buzz (Narayanan, 2009) reported that, India on Tuesday provided two percent cut in excise duty and service tax to give boost to the country’s economy….these duty reductions are likely to cost the treasury nearly Rs. 30,000 crore. This is above the four percent cut in CENVAT announced in December 2008, which has now been extended to beyond March 31.
4. The mega money printing process which started in 2008 still continues. For example, in October 2010 RBI bought back up to Rs. 12,000 crore of government securities as part of the government’s cash management operations (Roy, 2010). Just after couple of months, again in December 2010, RBI purchased government securities worth Rs. 12,000 crore (Prasad, 2010). Under this same mechanism RBI purchased total Rs. 48,000 crore worth of government security in various rounds of Open Market Operations (Sampat, 2011).
5. Since November 2010 Indian banks are borrowing on an average one trillion rupees daily from RBI!!! (D’silva, 2010).
6. Indian government is pumping crores of rupees for bailing out bankrupt inefficient public sector units e.g., recent Air India bailout of Rs. 12 billion rupees (Reuters, 2010).
Not only this, USA is also exporting inflation around the globe through its QE programs. How? Let us see.
The US dollar is an international reserve currency. That means citizens of every country need it for trade transactions with citizens of other country. Thus the demand for dollar is universal due to its international reserve currency status.
After the financial crash of 2007, US economy is in recession. To take the economy out of recession US central bank Federal Reserve and the Federal government is following Monetarists and Keynesian policies. In nutshell these policies are nothing but printing massive amount of money and thus increasing the money supply. These people (falsely) believe that spending huge amount of paper currency will spur the aggregate demand and that will lift the economy out of recession.
Conclusion
Inflation in India and all around the world is a result of government & central bank’s crazy Keynesian Monetarists policies of printing money to get economies out of recession. They don’t understand that, by printing money they are only going to create more havoc in people’s life by creating inflation or possible hyperinflation. Printing money is not wealth creation. It actually destroys wealth. It results in capital consumption which reduces the possibilities of higher economic growth in future. People need to understand that consumption never drives any economy. Economies grow because of savings, capital accumulation and production. Without production, consumption is impossible.
But, following their inherent inflationary nature, governments around the world are planning to blow another big economic bubble in the form of printing of 100 trillion dollar worth of fiat currency as a measure of global quantitative easing! This plan was discussed in recently concluded Davos World Economic Forum. Recently published papers of International Monetary Fund (IMF, 2010, 2011) lay out the blue print of future monetary system of one world paper currency named after Keynesian dream, Bancor. This plan, if successful, will plunge the world into a systematic worldwide inflation and ensuing global super depression.
(Madhusudan Raj teaches Austrian Economics at the department of Economics and the department of Human Resource Development, Veer Narmad South Gujarat University, Surat, India. He is an alumnus of the Mises University, Ludwig von Mises Institute, Auburn, Alabama, U.S.A.
The views expressed in the article are personal and do not reflect the official policy or position of the organisation.)
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