The inflation rate is alarmingly high in the Indian economy. Explain the steps that should be taken by the government in its budgetary policy to control the inflation rate.
Shubhangi,
Siddharth is right. The government can take Monetary and fiscal measures to control inflation. Monetary Policy is concerned with controlling the supply of money in the economy by the use of various monetary instruments, such as bank rate, SLR, CRR, etc. The following are some of the monetary measures that can be taken by the RBI for controlling inflation in the country.
i.Increase in bank rate- An increase in the bank rate increases the cost of borrowing of the commercial banks from the central bank. The commercial banks, in turn, increase the lending rate for their customers, thereby discouraging loans and credit in the economy. This reduces the total money supply and helps curb inflation.
ii. Open market sale of government securities wipes out the extra cash balance from the economy, thereby limiting the money supply. This, in turn, reduces the purchasing power of people, thereby reducing inflation.
iii. Increasing Statutory Liquidity Ratio restricts the banks in pumping money into the economy, thereby leading to a fall in the money supply & inflation
iv. Increasing Cash Reserve Ratio leads banks to keep a greater portion of their money in the form of deposits with the central bank, thereby reducing the lending capacity of the banks. This results in a fall in the money supply & inflation
Fiscal Policy is concerned with changes in government expenditure, taxation and public borrowings. The following are some of the fiscal measures that can be taken by the government to control inflation.
i. Reducing government expenditure : If inflation is high, the government can reduce its spending thereby removing itself from competing for resources in the market (both goods and services). This is a contractionary policy that would lower prices. Also, government should reduce unnecessary government expenditure on non development activities.Such expenditure increase the purchasing power of consumer without increasing output.
ii. Increasing taxation : fiscal measure to control inflation is to increase taxation and thus reducing the purchasing power of consumers.This will result in decrease in overall consumption expenditure in the economy and total money supply in circulation will decrease and inflation will be controlled.
iii. Reduction in public borrowings reduces the purchasing power of the people, reducing their demand for goods and services. This reduction in demand, in turn, leads to a fall in the price
level.
Siddharth is right. The government can take Monetary and fiscal measures to control inflation. Monetary Policy is concerned with controlling the supply of money in the economy by the use of various monetary instruments, such as bank rate, SLR, CRR, etc. The following are some of the monetary measures that can be taken by the RBI for controlling inflation in the country.
i.Increase in bank rate- An increase in the bank rate increases the cost of borrowing of the commercial banks from the central bank. The commercial banks, in turn, increase the lending rate for their customers, thereby discouraging loans and credit in the economy. This reduces the total money supply and helps curb inflation.
ii. Open market sale of government securities wipes out the extra cash balance from the economy, thereby limiting the money supply. This, in turn, reduces the purchasing power of people, thereby reducing inflation.
iii. Increasing Statutory Liquidity Ratio restricts the banks in pumping money into the economy, thereby leading to a fall in the money supply & inflation
iv. Increasing Cash Reserve Ratio leads banks to keep a greater portion of their money in the form of deposits with the central bank, thereby reducing the lending capacity of the banks. This results in a fall in the money supply & inflation
Fiscal Policy is concerned with changes in government expenditure, taxation and public borrowings. The following are some of the fiscal measures that can be taken by the government to control inflation.
i. Reducing government expenditure : If inflation is high, the government can reduce its spending thereby removing itself from competing for resources in the market (both goods and services). This is a contractionary policy that would lower prices. Also, government should reduce unnecessary government expenditure on non development activities.Such expenditure increase the purchasing power of consumer without increasing output.
ii. Increasing taxation : fiscal measure to control inflation is to increase taxation and thus reducing the purchasing power of consumers.This will result in decrease in overall consumption expenditure in the economy and total money supply in circulation will decrease and inflation will be controlled.
iii. Reduction in public borrowings reduces the purchasing power of the people, reducing their demand for goods and services. This reduction in demand, in turn, leads to a fall in the price
level.