Inflation in India: Managerial or macroeconomic problem?

Abstract

The recent global economic crisis has created a myriad of macroeconomic issues for the government and the RBI to handle. Apart from the growing concern of stable economic growth, unemployment and rising interest rates, the inflation rates have been rising continuously and thereby questioning the ability of the RBI and the government in its effective policy making. While unemployment reduced the income of the people in the earlier stage, the inflation severely compromised their buying capacity in the recovery stage. This has a macroeconomic outcome in reducing the overall productivity of the economy. Even though the government and the RBI has been working together to control the situation and bring back the economy to its path of steady growth it has been unable to control the inflationary spike which pretty much leave the economic growth ineffective with the inflation rate surpassing the current growth rate. While the growth rate has been pegged at 7%, the food inflation figures in the nation have been lingering at double figures and the total inflationary figure almost touching the double figure mark while the ideal inflation figure has been marked at 4-5%.i The need of the hour is a deeper understanding of the underlying factors of the current inflationary trend and how the macroeconomic policy measures can curb the rates spiraling out of control. We have seen how the RBI has been hiking the lending rates almost ten times in last few quarters in an effort to control money supply in the economy and hence reduce the demand-pull in the market. However these measure have been able to bring down inflation by a small margin, the food inflation continues to be a cause of concern. With another recession looming ahead, it is imperative that the policy makers are will prepared to face this situation and ensure that the adverse effects of another recession does not overload the economy to a catastrophic level. ii In this paper we will delve into the theory of inflation, the type of inflation our macroeconomic policies are modeled upon and determine whether the inflation is indeed a macroeconomic issue or due to the managerial inefficiency on the part of the government and propose recommendations to tackle the problem effectively.