Tuesday, June 24, 2008

Inflated Inflation!!

The news is all out. It always comes in the first page, with the finance minister as a cartoon, tearing his hair away. Why is it such an ambivalent issue, that everyone seems to be behind it. What is inflation exactly? Put in simple words it is just, the amount of supply of goods available today is running short of the demands of the same.

The growth has gone into such an orbit that, the demand for more and more resources in all the sectors have also plunged into a new high. But the resource's production of goods, is just not meeting that demand. For example consider the Construction industry. The most essential goods required for this industry is the steel, bricks, cement, gravel, sand, etc... What if some of these goods are not available in enough quantities. The construction industry will suffer. The growth is affected.

Due to less availability of resources, the demand in the market will increase. The cost of such resources will also increase. The more the cost of such goods increase, will again hinder the growth of the construction industry. Lets consider the basic everyday factor like say food. The demand of food requirement today is not reaching the food production. When Mr. Bush said the "Middle class of India and China have grown beyond bounds are eating a lot; which has led to global food scarcity.", the whole of Middle class were behind his comment. They started getting figures of how much Americans eat.

Just to understand, Americans have their demand and supply under control, which our growing economy has to get an hang on. The double figure inflation rate is just staring at them, which will itch the economy for a long time, unless the finance minister and the reserve bank of India pull a bunny out of the hat.

What can they do? The resources are limited, hence increasing them will take a long time for it to meet the demand of the countries ever growing hunger. Another method is to curb the growth, have a lower growth target and potential, which will lower the growth rate. Hence an balance between the inflation and growth rate is a juggle that keeps the finance minister on his feet.

This will involve, RBI increasing the interest rates. Which inturn will affect borrowing of money by loans, as the rate of repayment would be very high. This will affect the growth, which will bring demands down. This will keep the growth rate in check and also bring the inflation rate to an comfortable and stable level. There are many other such measures that have to be done, to lower the demand in the market. It sure will be decelerating the growth of the market, but has to be done to curb the inflated inflation.

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