Article;
The RBI Needs to Stimulate Growth While Containing Inflation
Comment;
Wages and prices
are flexible upwards and rigid down wards. The level prices once reach provides
a floor for further rise. You cannot reverse the situation just like before
completely. But you can always mend it a bit by policy intervention. Prices have
come down considerably but are above the natural rates. Philips Curve says that
long time back when employment rose 5% in the UK it inflated the economy by 5%.
If we generalize this empirical finding we can assume that in any economy 5%
increase in employment will produce 5% inflation. Which is the RBI’s comfort
zone 5-6% and the natural limit, and, frictional unemployment is 5%, also.
Currently, inflation is at 10% and this is food and fuel inflation close to CPI
and at best we can expect that the momentum remain constant, growth at 6%, and
the RBI’s intervention will bring down it to 7% as happens with WPI index. And,
if we rely on Keynes and his sticky prices we can not expect the inflation to
come down at 5% unless an economic eruption occurs that disturbs the
supply-demand scene or the real sector. But, it is true that prices and wages
are sticky. Income tax is an important tool to tackle demand and we know the
law of demand, high demand high prices and low demand low prices. So it tells
us that we need to use income tax to bring down aggregate demand and prices. Or
later we will use it and prices will not come down. The expansionary policy of
the government points to a regime of high prices too. The government should
revise the mandate of price stability…
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