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'Price rise is a fact of life. You have to adjust'

June 6, 2008

What is your take on the high inflation rates (8.24 per cent, as on June 6) and price rise that has affected the common man?

The inflation of 8.1 per cent of its own is not terribly worrisome: we have lived with much higher rate of inflation; other countries have higher inflation too; and there is enough empirical work to suggest that even if inflation goes to 15 per cent, it is not something we should consider as a 'disastrous.'

There was time in Latin American countries where inflation rate was 100 per cent to 200 per cent. Studies have been done on that. I was at the IMF at the time. It is fairly well-established that there is a certain rate of inflation beyond which things becomes risky.

Inflation means rate of increase in prices. But people don't appreciate that even if inflation is stable it doesn't mean prices are falling. Only when inflation becomes negative do prices start falling.

When inflation rate is higher it leads to inflationary expectations. People start thinking that inflation rate will go up further. Inflationary expectation leads you to lose confidence in your currency because inflation is nothing but the reflection of the value of your currency. When inflation goes up people get out of your currency and that is a risky point. In a globalised world there can be capital flight from a country. The immediate result could be a recession, as it happened in Latin American countries. This is the main danger of inflation.

The rise in prices means that there will be redistribution because prices of all commodities do not rise in same way. If prices of essential commodities are too high, people become worried. If essential commodities constitute three-fourth of the income of people, then they will have something to worry about.

The problem of inflation in a country like India is that it hits the poor people the hardest. It hits people who are already very poor -- as we have said in our report that 836 million people are earning only Rs 20 a day. If inflation goes up further and their purchasing power drops even more, they become destitute. That is one of the biggest dangers of inflation.

Image: Indane LPG cylinders stand at a colouring plant on the outskirts of New Delhi. | Photograph: Prakash Singh/AFP/Getty Images

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