POLICIES TO DEAL WITH INFLATION

 POLICIES TO DEAL WITH INFLATION

The correct policy to deal with inflation depends on the reason for the inflation. These are some of the policies to reduce inflation :

1. Reducing Demand

When the government believes that inflation is being caused by excess demand, it will try to use the below measures –

Monetary Policy – This initiative is taken by the central bank to reduce the money supply, and availability of credit in the economy. It puts restrictions on lending and increases the rate of interest, which induce savings and reduce borrowings, thereby decreasing the income in the hands of the people.

Anti-inflationary measures of a purely monetary nature are largely a matter of Central Bank policy.  The monetary policy is implemented by way of

• Bank rate: It is the minimum rate of interest of the Central Bank of the country. It is also the rate at which the Central bank discounts bills of exchange or securities. During inflation, higher bank policy or interest rate policy is one of the most important weapons of a central bank.When the bank rate is raised, the cost of borrowing by commercial banks from the central bank is raised and hence their lending rates follow suit.
• Open market operations : Open market operations  is the sale of government securities by the central bank to the public. As the public pay for the securities offered, they reduce their accounts by  the amount of the purchases and the member bank lose their reserve accounts by a similar amount with the Central Bank.

          

Fiscal Policy – The government increase taxes and reduce government spending, to take out money from people’s pockets, thereby reducing the demand in the economy.

2. Increasing Supply

Another way of overcoming the problem of inflation is to increase the supply of goods and services. This can be achieved by –

-          giving training to workers & making them more efficient

-          providing grants to encourage investment in latest equipments

-          promoting horizontal integration leading to economies of scale

-          improving the transport network.

3. Income Policies

It is an attempt by the government to slow down the rate at which costs of production are rising, by  controlling the incomes to the factors of production i.e. wages, interest, rent & profits. Since cost push inflation mainly occurs due to wages increasing more than productivity, income policies tend to concentrate on wages.The objective is to keep the growth of money income in line with the growth of real income. People’s money incomes should not increase faster than the supply of goods & services on which the incomes are spent.