Growth vs. Inflation

The controversial inflation-growth trade-off has been widely researched upon, both theoretically and empirically since the conception of the Phillips Curve which elucidates the negative relation between inflation and the level of unemployment.

In the present Indian scenario, the Inflation Vs Growth debate has assumed renewed importance and significance. In light of the events in the recent past and the visible difference in opinion between the government and the central bank, it has become important to take another look at this age old debate.

Traditionally, growth has been facilitated by an amalgamation of rising consumption and increasing fiscal deficit. It is needless to say that containing the inflation resulting from rising consumption and income levels is one of the main challenges the government is facing today.

Inflation

The concept of inflation has traditionally been assumed as a major reason for instability in a country‘s economy. The plausible reason behind this is the further disparity it creates in the purchasing power of goods. The relevance of this issue is heightened in an economy like that of India, which is characterized by widespread economic inequity and disparity. The worst sufferers in an economy characterized by high inflation are the poorest in the society. The twelfth five year plan has stressed the importance of inclusive growth in the present scenario. In such a back-drop, the cost of inflation seems to have magnified the further situation and as the consequence of rising inflation, export liberalization is probably going to be one of the best inducers of growth. Encouragement of policies like welcoming of foreign investment in Multi brand retail is going to assist growth with a lower inflationary impact.

Interest Rate Hikes, Unemployment and Global Recession

The first quarter of the year saw the Reserve bank hike interest rates to curb investments thereby temporarily curbing inflation. However this move by the RBI has dampened growth projections for the year 2012-13. More importantly in an economy experiencing a down-swing induced by global recessionary factors, the relevance of employment cannot be superseded. It is reported that every percentage fall in economic growth reduces the number of new jobs created by ten million. The severe consequence of this is unemployment of a large section of skilled, educated and trained youth.

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The global recession though little late did have a severe impact on the Indian economy, particularly in the then booming information technology sector, which operated majorly in collaboration with giant Multinational Corporations headquartered in the Western countries. This resulted in a huge number of lay-offs and a decline in the pay-rolls of the employees.

How can the Government enable Growth of the Indian Economy

i) The idea of direct cash transfers to the lowest strata of the economy would enable the benefits of growth to undergo “trickle-down effect” where the positive impact of economic growth is transferred to the grassroots of the economy. The facilitation of such a measure will be a challenge to the government, given the infrastructural requirements that are brought forward by such a policy. Also, the faults in the Indian administrative setup will be a major barrier to such a policy. It becomes important to focus on the significance of mobilization of financial resources at every level of society.

ii) Fast-tracking of infrastructure projects and pending regulatory clearances, with a focus on removing supply-side bottlenecks in areas such as power, transportation and agriculture would boost the growth potential of the Indian economy and contribute towards easing inflationary pressures.

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iii) The RBI‘s recent step of keeping the reserve ratios largely unchanged indicates the Central Bank‘s concern to curb inflation. The decision was received with skepticism by the finance ministry and the banks as it would not help the investment climate in any way.

iv) The Indian economy has suffered recently due to the Euro crisis and the down-swing in the American economy, curbing exports and inflow of capital for investments. The change in the FDI policies created a thriving environment for growth. More importantly, the experience of that period showed that the resultant effect on inflation was minimal as compared to growth, triggered from increased consumption or investment. The growth and lowering of inflation took place hand in hand, post the implementation of the reforms in the early nineties.

v) The government should ideally focus on the holistic growth and development of the country and allow the Central Bank to take its course of action in terms of monetary policies.

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