A peek into the past shows that prices have never really fallen in our country.

From the 1950s, most spurts in inflation have been triggered by setbacks in agricultural production due to poor monsoons. Things have worsened when prices of industrial raw materials have increased. Since the 1960s, large fiscal deficits, the subsequent injection of money into the economy, and the hoarding of essential commodities by speculators, have been other factors causing inflation.

Bad monsoons and harvests triggered inflation in the mid-'50s. In the mid-'60s, decelerating industrial output, setbacks in agricultural production, and the devaluation of the rupee were responsible for high inflation from 1964-65 to 196768. The international oil crisis of 1973 coincided with inflation above 16 per cent. It was only during the Emergency inflation came down to zero (in 1975-76) because of good agricultural production and a crackdown on speculation in commodities.

But the trend was reversed with Charan Singh's 1979 budget, which fuelled price hikes through higher indirect taxes on some essential commodities. This eased a bit in 1985-86, when foodgrain production was a record 150 million tonnes. But it was back to square one the following year and in subsequent years, as agricultural production suffered.

Causes of Inflation Now, for the most important part the causes of inflation. So what are the culprits behind the devil, that is, inflation? Here are some of them 1. Too much money chasing too few goods This is actually a super cause, as it explains a number of causes simultaneously. For example, if the wages of every worker (blue collar/white collar/every-other-color collar) is increased by, say, 20% tomorrow morning, what do you think will happen? Some will want to purchase new refrigerators, some will want new houses, while some will need new cars. Production will take some time, so what happens in between? The demand vs supply equation will come into play,

2.

3.

4.

5. 6.

7.

with an increase in prices of things demanded. Yes, you guessed it right that is inflation! This also explains a popular fantasy why doesnt the government simply print more money, and make everyone rich? Because that will mean excess money in system without a corresponding increase in the amount of goods produced or services rendered. In other words, you have to work before you will get paid anything. What a revelation! Increase in Production Costs Let us take the above example once again. The workers demand a wage increase, and actually get it. This means that the labor cost per unit will increase for the manufacturer, and you can trust that it will be passed to the ultimate consumer. The customers will have to shell out more to purchase the same amount of goods, leading to inflation in prices. Taxation Indirect taxation, such as VAT, sales tax, excise tax etc, has the effect of increasing the cost of goods for the eventual consumers, leading to increased inflation. On the other hand, a decrease in Income Tax rate will mean more disposable income for consumers again leading to higher inflation. Increase in Price of Imported Raw Materials The best example for India would be petroleum almost all of our requirement in petroleum is imported. An increase in prices, as during the summer of 2008, can really accelerate inflation in India. Depreciation in Exchange Rates This increases the price of imports into the country, and decreases the price of exports abroad. Decrease in Interest Rates This leads to an increase in money supply, leading to inflationary pressure. In other words, the monetary policies adopted by the RBI can affect inflation rates, at least to a certain extent Rapid Economic Growth Especially if take place in the markets to which the country exports.

The '90s have been marked by high inflation. The tone was set by the fiscal crisis of 1991, when high deficits in government finances and devaluation of the rupee caused galloping inflation of 13.66 per cent. It was later controlled, but the average rate of inflation over seven years of liberalisation has been a substantial 9.3 per cent per year. How about the revaluation of the Indian Rupee?

To conclude, all these are pointers to a need for a different strategy. The current bout of inflation is caused by a multiplicity of factors, mostly global and is structural. Monetary as well as trade policy responses, as has been attempted till date, would be inadequate to deal with the extant issue effectively. Crucially, a stock market boom, a real estate boom and a benign inflation in the foodgrains market is an economic impossibility. It has to be noted that the Indian market is structurally suited for leveraging shortages rather effectively. Added to this is the information asymmetry among various class of consumers as well as between consumers, on the one hand, and producers and consumers, on the other. Further, the sustained flow of foreign money, thanks to the excessive global liquidity in the world, has fuelled the rise of the stock markets and real estate prices in India to unprecedented levels. This boom has naturally led to corresponding booms in various related markets as much as the increased credit flow has in a way resulted in overall inflation. Economic policy rests in the triumvirate of fiscal, monetary and trade policies. Theoretical understanding of economics meant that these policies are interdependent. Also, one needs to understand that growth naturally comes with its attendant costs and consequences. While these policies are usually intertwined and typically compensatory, one has to understand that the issues with respect to inflation cannot be subjected to conventional wisdom in the era of globalisation. One policy route yet unexamined in the Indian context by the government is the exchange rate policy, especially revaluation of the Rupee as an instrument to control inflation. It is time that we think about a revaluation of the Indian Rupee as a policy response to the complex issue of managing inflation, while simultaneously address the constraints on the supply side on food grains through increase in domestic production. A higher Rupee value vis--vis the dollar would mean lower purchase price of commodities in Rupee terms. The Indian economy has undergone significant

changes in the past decade and a half. With increased linkages to the global economy, it cannot duck the negatives of globalisation. Quite the contrary, it needs to come with appropriate policy responses for the same, which cannot be of the 1960s vintage. Allowing Rupee to appreciate is surely one of them. The time for a rethink on our exchange rate policy to tackle inflation is now. Are we ready? HOW TO TACKLE INFLATION IN INDIA Inflation is no stranger to the Indian economy. In fact, till the early nineties Indians were used to double-digit inflation and its attendant consequences. But, since the mid-nineties controlling inflation has become a priority for policy framers. The natural fallout of this has been that we, as a nation, have become virtually intolerant to inflation. While inflation till the early nineties was primarily caused by domestic factors (supply usually was unable to meet demand, resulting in the classical definition of inflation of too much money chasing too few goods), today the situation has changed significantly. Inflation today is caused more by global rather than by domestic factors. Naturally, as the Indian economy undergoes structural changes, the causes of domestic inflation too have undergone tectonic changes. Needless to emphasize, causes of today's inflation are complicated. However, it is indeed intriguing that the policy response even to this day unfortunately has been fixated on the traditional anti-inflation instruments of the pre-liberalization era.

How about the revaluation of the Indian Rupee? To conclude, all these are pointers to a need for a different strategy. The current bout of inflation is caused by a multiplicity of factors, mostly global and is structural. Monetary as well as trade policy responses, as has been attempted till date, would be inadequate to deal with the extant issue effectively. Crucially, a stock market boom, a real estate boom and a benign inflation in the food grains market is an economic impossibility.

It has to be noted that the Indian market is structurally suited for leveraging shortages rather effectively. Added to this is the information asymmetry among various class of consumers as well as between consumers, on the one hand, and producers and consumers, on the other. Further, the sustained flow of foreign money, thanks to the excessive global liquidity in the world, has fuelled the rise of the stock markets and real estate prices in India to unprecedented levels. This boom has naturally led to corresponding booms in various related markets as much as the increased credit flow has in a way resulted in overall inflation. Economic policy rests in the triumvirate of fiscal, monetary and trade policies. Theoretical understanding of economics meant that these policies are interdependent. Also, one needs to understand that growth naturally comes with its attendant costs and consequences. While these policies are usually intertwined and typically compensatory, one has to understand that the issues with respect to inflation cannot be subjected to conventional wisdom in the era of globalization. One policy route yet unexamined in the Indian context by the government is the exchange rate policy, especially revaluation of the Rupee as an instrument to control inflation. It is time that we think about a revaluation of the Indian Rupee as a policy response to the complex issue of managing inflation; while simultaneously address the constraints on the supply side on food grains through increase in domestic production. A higher Rupee value vice-versa the dollar would mean lower purchase price of commodities in Rupee terms. The Indian economy has undergone significant changes in the past decade and a half. With increased linkages to the global economy, it cannot duck the negatives of globalization. One policy route yet unexamined in the Indian context by the government is the exchange rate policy, especially revaluation of the Rupee as an instrument to control inflation. It is time that we think about a revaluation of the Indian Rupee as a policy response to the complex issue of managing inflation; while simultaneously address the

constraints on the supply side on food grains through increase in domestic production. A higher Rupee value vice-versa the dollar would mean lower purchase price of commodities in Rupee terms. The Indian economy has undergone significant changes in the past decade and a half. With increased linkages to the global economy, it cannot duck the negatives of globalization. Quite the contrary, it needs to come with appropriate policy responses for the same, which cannot be of the 1960s vintage. Allowing Rupee to appreciate is surely one of them. The time for a rethink on our exchange rate policy to tackle inflation is now. Are we ready?