Measures to Control Inflation

Introduction

• The government adopts various measures to control the increase in the price of goods and services. In India, the Reserve Bank of India (RBI) is responsible for controlling inflation. Inflation targeting and to keep inflation within the set target is the responsibility of RBI. 
• However, the RBI through its monetary policies can only control demand and pull inflation to a limited extent. The RBI can only control credit flow in the economy by taking away surplus money from the banking system. However, in this process economic growth is affected. The RBI cannot control that part of inflation which is driven by black money. 
• In case the public expenditure (expenditure of the government) remains high and the monetary policies become ineffective. At the same time, in controlling cost push inflation and structural inflation the role of government and state government is more important as compared to the RBI. Hence, inflation can be controlled only through the combined efforts of the RBI, the central government as well as state governments.

Monetary Policy Measures

• There is a close link between the money supply and inflation, Therefore, controlling money supply with the help of monetary policy can be controlled. 
• Using contractionary monetary policy, the money supply in the economy can be decreased. This leads to decrease in aggregate demand in the market and thereby reduces inflation.

• Decrease in supply of money → rate of interest increases → Investment decreases → Aggregate demand decreases → prices decline → rate of inflation is lower

• Similar process follows when CRR, SLR, Repo Rates are increased and decreased. 
• Rates like CRR, SLR, Repo Rate and Reverse Repo Rate are increased to impact the money supply in the economy by the RBI to control inflation.

Fiscal Policy Measures

• Fiscal Policy refers to the revenue and expenditure policy of the government. y Contractionary Fiscal Policy can be useful to tackle high inflation rates. 
• The process is as follows: Increased taxes (keeping government spending constant) → disposable personal income decreases→ consumption decreases → aggregate demand decreases → prices decline → rate of inflation is lowered y Similar process follows if the government cuts down on its expenditures without raising taxes (or reduces its deficit/ increases surplus). 

• Some of the fiscal policy measures are – reducing import duties,  banning exports or Imposing minimum export prices, suspending the futures trading of commodities, raising the stock limit for commodities, etc.

Supply Measurement Measures

• Supply Management Measures aims to increase the competitiveness and efficiency of the supply chain, putting downward pressure on long-term costs. 
• Some of the supply management measures taken are-

1. Restricting exports of commodities in short supply and increasing their imports.
2. Effective implementation of the Essential Commodities Act, 1952 to prevent hoarding and speculation. 
3. Incentivizing the increase in production of commodities through tax concessions, subsidies, institutional support etc. 
4. Higher MSP has been announced to incentivize production and thereby enhance the availability of food items which may help moderate prices.
5.  Fixing the ceiling prices of the commodities and taking measures to control the black marketing of those goods. 
6. Reforming the supply chain through infrastructure development, foreign investments etc.

Constraints in Controlling Inflation

• India imports more than 80 percent of its oil requirements. Oil prices are volatile owing to the various Political and Economic events in the international arena. 
• Long overdue supply-side reforms. y Inefficiencies in the monetary policy transmission. 
• Limited control of Government and RBI in controlling rupee depreciation. 
• Political compulsion in reducing expenditure and fiscal deficit. 
• Populist measures of the government.