How to Control Inflation? | Money

The following article will guide you about how can inflation be controlled.

A. Monetary Measures:

Anti-inflationary measures of a purely monetary nature are largely a matter of central bank policy. As one basic cause of inflationary rise in price is the excessive increase in money supply, monetary measures are adopted to reduce or control the supply of both currency and credit.

The following are some important monetary measures:

(1) Restriction on Undue Expansion of Bank Credit:

To curb inflationary pressures in the economy, the central bank of a country adopts various credit restraining measures, such as the raising of the bank rate and other lending rates of banks, the sale of securities, raising of the reserve ratio, higher margin for certain types of speculative bank advances, restrictions on instalment buying of consumer goods operated through bank advances, etc.

(2) Control on the Issue of Paper-Notes:

For curing inflation the monetary authorities may reduce the volume of legal tender money by withdrawing a part of notes issued.

(3) De-Monetisation:

When inflation reaches the extreme limit, the gov­ernment of the country may de-monetise the existing paper notes and issue new money in that place. This measure was adopted partly in our country during the Second World War and in January 1978 in respect of paper-notes of high denominations.

(4) Blocking of Liquid Assets:

A portion of liquid assets of the people may be blocked through the measures like the impounding of additional emolu­ments of the people, restrictions on dividends, impounding of bank depos­its, etc. (as done in our country in 1973-74).

Limitation of monetary measures:

But experiences have shown that the monetary measures alone are not adequate to control inflation effectively. A. H. Hansen remarks, “Exclusive reliance upon monetary policy as the means to cope with the inflation is a dangerously one-sided weapon”. Monetary measures operate mainly through interest rates changes. But higher interest rates may not always bring about a fall in investment and consumption outlays.

Apart from this fundamental weakness of the interest rate policy, the following are some important limitations of monetary measures:

(a) Lim­ited efficacy of the bank-rate policy in the under-developed money market in the absence of well-organised bill markets,

(b) No direct control over the price-level through the regulation of money supply,

(c) Fear of a sudden collapse of the economy due to a drastic credit contraction, and

(d) Fear of rapid fall in the prices of government securities due to a large-scale sale of the government securities by the central bank.

B. Fiscal Measures:

Anti-inflationary fiscal measures involve adjustments in government spending, taxes and public borrowings.

The following fiscal measures are usually adopted to control inflation:

(a) A reduction in the government’s expenditures through the curtail­ment in non-essential expenditure, budgetary economy in government spending, and reduction in the government’s deficit;

(b) An increase in the rates of taxation on incomes, expenditures, capital gains, wealth, etc. to reduce the disposable incomes of the people, but a decrease in import duties to facilitate a larger supply of essential goods;

(c) An increase in the excise duties on luxury articles to discourage their consumption during inflation;

(d) An increase in the government’s borrowings from the public to mop up the additional purchasing power; and

(e) The introduction of compulsory savings to immobilise a part of the additional purchasing power coming to the hands of the people during inflation.

But fiscal policy, being largely a matter of unpredictable political decision, cannot be relied upon to the exclusion of purely monetary measures for combating inflation.

C. Direct or Non-Monetary Measures:

Besides these monetary and fiscal measures, the following direct measures are also adopted for combating inflation:

(i) An increase in the production and supplies of essential goods through the diversion of resources from the unproductive sectors to the productive ones;

(ii) Control of wages and other allowances through the measures like wage-freeze, restriction on additional emoluments, deferred pay, etc.;

(iii) Introduction of price-control-cum and of rationing of consumption of essential items of consumption (especially food and fuel),

(iv) Strict control over the speculative activities in shares, land, etc.;

(v) Arrangement for the sale of essential goods through fair price shops, co-operatives, etc.;

(vi) Vigorous drive against hoarding, smuggling, tax-evasions, black money, etc., and,

(vii) Various legislative and punitive measures for dealing with economic offences.

Conclusion:

Past experiences have demonstrated that any single group of measures (monetary or fiscal or direct) is not adequate for combating inflation properly and fully. The effective anti-inflationary policy should combine all the major elements of these three broad groups of measures.