Wednesday, September 14, 2011

Inflation on the rise - is interest hike the proper tool to tackle it

Inflation in India refuses to let go. The wholesale price index for the month of August rose 9.78% compared 9.22% for the previous month.

The measures taken by the government to curb the rising prices do not seem to be working. Reserve Bank of India (RBI) has raised interest rates 11 times in 18 months and the current rise in inflation is pointing to one more interest hike in the coming days. So much so, Indian Industry has begun to show signs of suffering from the effect of the interest rate hikes.

Some experts argue that the route of interest hike by RBI is not working because possibly liquidity if not the cause of this inflation.

Here are some  reasons that have come forward in our discussions...
  • a rise in the trend of unfair trade practices used to secure disproportionate and unreasonably high levels of profit.
    • The issue is more than evident in the pharmaceutical industry where medicines that leave the factory for Rs. 2 to 3 carry the MRP tag of more than Rs. 30-40.
    • Simple nuts and bolts for bikes and cars that manufacture for a few paise are sold to the consumers for fabulous prices.
    Where are the days when a decent profit of 10% to 15% was considered adequate? Can this not be controlled or should this not be controlled?
  • improper implementation of government policies and schemes... There is a clear lack of coordination between different government departments and the way the departments work within themselves.
    for eg -
    • The government announces a ban to export of onion and the agriculture minister goes public that he is not party to the decision.
    • Foodgrains are rotting kept in the open - the government does not have enough capacity to store them properly, yet people are hungry - even the Supreme Court has voiced its opinion in this matter.
  • oversupply leads to inflation - The quantity of medicines that expire is increasing year-on-year, because some of the manufacturers seem to think that they can produce the entire spectrum and conquer the entire market. This is just not possible - so what happens - the medicines expire on the shelves within the distribution chain at the cost of the manufacturer. The manufacturer is forced to compensate for the loss incurred in this by increasing the prices of the regularly selling products - that's inflation.
  • Crude used to be available in the range of 20-30 dollars for a long time - surely the cost of extracting crude from mother earth has not gone up as much as the price it is selling for - is this much profiteering justified?
  • Last but not the least - corruption. Corruption has made so much in roads in our day-to-day activities that it has become one of the major contributors to the runaway inflation. An event like the Commonwealth Games should have ideally required a few crores to organize, but thanks to the corrupt organizers have siphoned off thousands of crores of tax-money and probably stashed it off in some Swiss Account. Now the government will have to raise taxes which will in turn send prices north.
There are many such reasons for the inflation that the common man faces, the experts need to examine these and take proper steps before things go out of hand.

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