Q5(b). What do you mean by Inflation? How can it be controlled?

“Inflation is always and everywhere a monetary phenomenon.” – Milton Friedman

Inflation refers to a sustained rise in the general price level of goods and services over time. It reduces the purchasing power of money.

Measured by:

• CPI (Consumer Price Index)
• WPI (Wholesale Price Index).

Types of Inflation

• Demand-pull: excess demand over supply.
• Cost-push: rise in input costs (fuel, raw materials).
• Structural: supply bottlenecks (agriculture, logistics).

How Can Inflation Be Controlled?

1. Monetary Measures (RBI)

• Repo rate hikes reduce money supply, curb demand.
• Open Market Operations (OMOs) absorb liquidity.
• CRR/SLR adjustments influence credit availability.

RBI uses Inflation Targeting Framework: Target: 4% ± 2%.

2. Fiscal Measures (Government)

• Reducing fiscal deficit,
• Cutting unnecessary subsidies,
• Rationalising government expenditure,
• Counter-cyclical taxation (e.g., reducing fuel taxes during spikes).

3. Supply-Side Measures

• Importing essential commodities,
• Strengthening agricultural supply chains,
• Buffer stocks of food grains (FCI),
• Reducing logistics and storage gaps.

4. Long-Term Structural Measures

• Agricultural reforms for higher productivity,
• Investment in rural infrastructure,
• Reducing dependence on imported crude oil,
• Promoting renewable energy.

Inflation control requires coordination between RBI’s monetary policy, Government’s fiscal management, and structural reforms, ensuring macroeconomic stability.