Tuesday, March 1, 2011

1162 - Inflation Trade-off - Source Times of India

Feb 28, 2011, 12.00am IST

While current inflation levels certainly need to be brought down, this year's Economic Survey has a radical suggestion - inflation may be here to stay with us if we want a high-growth economy. Using crude instruments to bring down inflation could have unpalatable consequences - such as loss of output and jobs, factories closing down and farms becoming less productive. If that is the case, rather than curbing inflation radically, an alternate course would be to work out ways of shielding the poor from the effects of inflation. Since the bulk of the poor's income is consumed by food, it's food inflation that any insurance policy should seek to cover. Here, the Survey notes that the public distribution system haemorrhages between 40% and 55% of essential commodities that pass through it. It needs to be reformed drastically, or better still bypassed with a system of food coupons or cash transfers.

If we were to move to food coupons or cash transfers, besides cutting wastage an additional advantage would be that they could be indexed easily to the prevailing inflation rate. Similarly, the Agricultural Produce Marketing Committee (APMC) Act needs to be revoked. Having degenerated into a cartel, farmers are paid poorly while middlemen make disproportionate profits by selling dearly. Opening up to organised retail could create a replacement for the APMC by allowing farmers to sell direct to shops. Interlinked with these is the Aadhaar identity card project because it eliminates the need for a PDS.  Aadhaar would also permit the poor to directly access the formal banking system. Combined, these measures would help government keep overall inflation to a bearable 5% to 7% while also permitting the poor to improve their living standards.

Read more: Inflation Trade-off - The Times of India http://timesofindia.indiatimes.com/home/opinion/edit-page/Inflation-Trade-off/articleshow/7587114.cms#ixzz1FFR0gciK