Sustainability of economic growth & Controlling Inflation

Definition of Sustainability of economic growth

Sustainable development is a pattern of resource use

that aims to meet human needs while preserving the environment so that these needs can be met not only in the present, but also for generations to come. ... OR : Sustainable economic growth in operational terms is the upward trend in environmentally adjusted net domestic product (EDP) under certain conditions and assumptions (Bartelmus, 1994).

What is inflation ?
In simple terms, inflation is a situation where

too much money chases too few goods . OR Inflation means a considerable and persistent rise in the general level of prices of goods and services in an economy over a period of time.

Inflation in economic terms is the percentage by which demand is higher than the supply. For example, if the inflation rate is 5% for a particular item, it means that the demand is 5% more than the total supply of that particular item.
Inflation can also be defined as an increase in the general level of price of goods and services over a period of time. It is measured as an annual percentage increase and is a major concern for common people. It negatively affects the purchasing power of money as you can buy less of goods and services with same amount of money.

What are the types of inflation?

Economists have classified inflation into several heads. Demand pull inflation When demand grows faster than supply it pushes general prices up. This can be described as too much money chasing too few goods. India being a growing economy has experienced this type of inflation for years. Almost all industries in India face demand pull inflation especially when it comes to the technology driven industry like Automobile, Consumer Electronics. Cost push inflation This is also known as supply shock inflation. When there is shortage of a particular product it causes the price levels to rise which has a ripple effect on the economy thus leading to inflation.

Pricing power inflation This type of inflation is caused by business houses who tend to increase prices to increase their profit margins. It is more common in oligopolistic economies
The recent rise in inflation has been termed as skewflation or skew inflation. This term has been coined observing the unusual inflation wherein there was huge inflation in the food sector with the non-food sector remaining more or less constant. Causes/reasons of inflation Printing too much money by the central bank causes inflation. When banks ease the lending norms and liquidity in market increases beyond a limit, which is sufficient for the required industrial development. Increase in labor costs and production costs sets off a spiraling effect on the general price levels and causes inflation. High levels of taxation can also cause inflation. Inflation can also be attributed to increase in wages. Money which is unaccounted or unrecorded like black money is also a major factor behind rising inflation rates.

How inflation is a threat to Indian economy The global economic crisis saw many economies stumble but India rebounded faster and was surging ahead with a growth rate of 9%. But the inflationary pressure is forcing the government to adopt measures which are taking the steam out of the Indian growth story. For the last two years India is witnessing double digit food inflation which had reached a high of around 18% in December 2010 with prices of onions, garlic and tomatoes skyrocketing. Lentils, milk and meat have witnessed a steady rise in prices which is putting pressure on the home budget of millions of Indians. Millions of poor people in India are struggling to arrange a two-square meal for their family members. We are running the risk of having an entire generation of malnourished children who are otherwise considered the future of India. The tightening of the economy may control inflation in the long run but it is also slowing our economy and as predicted by the IMF Indias growth will be only around 6-7% instead of 9%.

How to control the inflation? In India the Reserve Bank of India (RBI) has adopted monetary policies to control inflation. Since March 2010 the RBI has raised key policy rates nine times in order to rein in inflation. Along with these it has also adopted a variety of fiscal measures like reducing exports of essential items like onions and pulses and also encouraging imports. There are broadly two ways of controlling inflation in an economy: 1). Monetary measures and 2). Fiscal measures I).Monetary Measures The most important and commonly used method to control inflation is monetary policy of the Central Bank. Most central banks use high interest rates as the traditional way to fight or prevent inflation. Monetary measures used to control inflation include: (i) bank rate policy (ii) cash reserve ratio and (iii) open market operations.

Bank rate policy is used as the main instrument of monetary control during the period of inflation. When the central bank raises the bank rate, it is said to have adopted a dear money policy. The increase in bank rate increases the cost of borrowing which reduces commercial banks borrowing from the central bank. Consequently, the flow of money from the commercial banks to the public gets reduced. Therefore, inflation is controlled to the extent it is caused by the bank credit.
Cash Reserve Ratio (CRR) : To control inflation, the central bank raises the CRR which reduces the lending capacity of the commercial banks. Consequently, flow of money from commercial banks to public decreases. In the process, it halts the rise in prices to the extent it is caused by banks credits to the public.

Open Market Operations: Open market operations refer to sale and purchase of government securities and bonds by the central bank. To control inflation, central bank sells the government securities to the public through the banks. This results in transfer of a part of bank deposits to central bank account and reduces credit creation capacity of the commercial banks.

II). Fiscal Measures Fiscal measures to control inflation include taxation, government expenditure and public borrowings. The government can also take some protectionist measures (such as banning the export of essential items such as pulses, cereals and oils to support the domestic consumption, encourage imports by lowering duties on import items etc.).

Current status of inflation in India

Currently inflation rate is around 9.44% in India, much above the acceptable rate of 5%. The food price index is at 8.31% causing much discomfort to the policymakers. Economists have strongly criticized the Indian government for not being able to restrict inflation. They also feel that RBI needs to take additional measures to tame down inflation. The RBI has decided to review its monetary policies mid-quarterly to assess the economic scenario. Economists have welcomed this move as such proactive reaction is needed in times of economic volatility. The Indian policymakers are walking on a tight rope and it is yet to see whether they can bring back inflation to the acceptable 5% mark which under the current scenario seems impossible.

Food inflation soars to disturbing level of 10.05 percent | Written on 1 Sep, 2011 at 17:17 in Business
The following are the yearly rise and fall in prices of some main commodities that form the sub-index for food articles: Onions: 57.01 percent Vegetables: 15.78 percent Fruits: 21.58 percent Potatoes: 13.31 percent Eggs, meat, fish: 12.62 percent Cereals: 4.64 percent Rice: 4.40 percent Wheat: (-) 2.52 percent Pulses: (-) 4.16 percent