Article;
Containing financial risks more important than propping growth.
Comment;
Our objective is price
stability with full-employment. Because when there is full employment there is
no one dependent on the State, means a zero fiscal deficit, which actually will
necessitate no further taxes. The economy will be in equilibrium... But the
problem is non-accelerating-inflation-rate of unemployment, NAIRU. It is
different for different countries. It is calculated by research. But i think in
a large country like INDIA it must be around 4-6%. But our current unemployment
rate is 3% which is out of our range (4-6%) in which inflation becomes low and
stable. It is in a range which has put pressure on prices to go up, an upward
bias. Income is rising faster than employment. The market is competing for
labor and the RBI has put brakes on the interest rate which has also put brakes
on higher wages and income (indirectly). The RBI is trying to avoid a
wage-price spiral but in the long-run wages and income will go up in real terms
because we are trying to converge our per capita income to the developed
countries' figures. Wages and income rise in real terms also when prices fall.
As long as the RBI can not tolerate higher wages and income it can concentrate
to look at the real side of the issue, lower prices and higher real wages and
incomes. But inflation (WPI) is again inching above to hurt real wages/income.
I think in the short run the RBI can choose to keep the value of money, and
therefore, wages/income intact by choosing higher interest rates (months)...
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