The Hindu Business Line : <I>Inflation concerns</I>

It appears that even as we are grappling with inflation raising its ugly head, our forex reserves may reach $200 billion shortly (Business Line, February 17). When the reserves touched $100 billion, it was a matter of jubilation. But subsequent increases made policymakers think of the cost of carrying huge reserves with a tinge of anxiety. Concern with immediate consequences apart, how to deploy the reserves continues to be the subject of debate. In this connection, the measures adopted by China and Singapore are frequently referred to by those in important positions such as the RBI Governor, Dr Y. V. Reddy.

Advanced countries may welcome any amount of accretion of reserves because their effect on the economies may not be serious. But in a growing economy, particularly in a period of rapid expansion, the inflow of foreign exchange will accelerate the inflationary spiral. This is bound to be so, even granting that the excess over and above what is agreed upon to be safe is invested fruitfully in sectors such as infrastructure and agriculture (where there is a crying need for huge investments), as these activities themselves will engender inflation.

It is gratifying that well in advance of the Budget, the Centre had taken steps to reduce constraints on the supply-side, by reducing the prices of petrol and diesel, cutting Customs duties, and so on. But measures to improve supply can never be commensurate enough to meet the demand. Therefore,, not only will inflation remain unabated, it may even accelerate — a situation the country is now facing.

To tackle inflation, apart from effecting changes in fiscal and monetary policies, other measures are also needed. First, there should be tight control over the functioning of the stock market, especially to ensure that sharp volatility in share prices do not lead to massive withdrawal of funds by foreign investors or NRIs. Such disturbances have an impact on the prevailing exchange rates which, in turn, influence the value of the rupee.

Second, whether stringent rationing of different goods supplied to the community will provide a solution must be considered. Can there be large-scale restrictions in the use of private vehicles and energy-consuming appliances such as air-conditioners? Can wastage of power, water, and so on, be reduced substantially? As a corollary, can the total energy expended by public utility services be reduced?

It may be argued that even if these measures are implemented, the effects will only be marginal. Still, they are sure to bring about increasing awareness among the public of the efforts required to tackle inflation. Such moves are said to be successful in China. It can be a lesson for India too.

France thought it fit to cut the hours of illumination of the Eiffel Tower to combat global warming! It is a significant step, symbolising the spirit behind a mission. A similar spirit should drive India too.

(The author is a Bangalore-based freelance writer.)