The Hindu Business Line : Inflation rate

This is with reference to the report entitled “A tale of two ‘low’ inflation episodes” (Business Line, November 12). The Finance Minister, Mr P. Chidambaram, has attributed the fall in inflation rate to tight monetary policy.

According to the RBI, the overhang of liquidity in the system, as on October 24, amounted to Rs 2,22,582 crore. M{-3} grew by 22.5 per cent — the highest rate in a decade.

One reason cited for the high inflation of the past is the supply constraint. By the same logic, the current trend is attributed to the arrival of the kharif crop in the market improving supplies of essential commodities. But it is illogical to argue that it is either supply or demand that causes changes in prices. It is both.

If there is short supply, it also means that the available demand, represented by the money supply, drives up prices.

Another explanation given is the ‘base effect’. This is not an economic explanation. No standard technical literature on the subject talks about it. If it were true, low inflation is a harbinger of high prices one year hence.

A. Seshan e-mail

Mounting subsidies

The Prime Minister, Dr Manmohan Singh, while clearing the draft Eleventh Plan, expressed concern over the increasing food, fertiliser and oil subsidies burden, exceeding Rs 1 lakh crore and its adverse impact on economic growth and development.

One way of reducing subsidies on fertilisers is to issue “agri input stamps” to small and marginal farmers, thus eliminating the regressive nature of the subsidies.

Another means is to eliminate bogus ration cards. It is equally necessary to take measures to augment the Centre’s tax income. Eliminating unnecessary expenditure by the Government will result in apportioning more tax income for developmental purposes.

K. Ramasubbareddy Hyderabad