Measures to Control Inflation

Introduction

Inflation, if left unchecked, can destabilize an economy. Economists like J.M. Keynes and Milton Friedman suggested three broad categories of measures to control inflation: monetary measures, fiscal measures, and other structural measures. These policies aim to reduce excess demand, control money supply, and ensure long-term stability in prices.

1. Monetary Measures

Monetary measures are tools used by the Central Bank (RBI in India) to regulate money supply and credit in the economy.

• Increase in Bank Rate: Raising the rate at which the RBI lends to commercial banks discourages borrowing and reduces liquidity, thereby controlling inflation.
• Open Market Operations (OMO): The RBI sells government securities in the open market, reducing money supply in circulation.
• Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR): Increasing CRR and SLR compels banks to hold more reserves with the RBI and invest in government securities, reducing the funds available for lending.
• Repo Rate and Reverse Repo Rate: A higher repo rate (rate at which banks borrow from RBI) discourages lending, while a higher reverse repo rate encourages banks to park funds with RBI, reducing liquidity.
• Consumer Credit Control & Margin Requirements: By tightening rules on consumer loans or raising margin requirements on loans against securities, the RBI can curb speculative and excessive borrowing.

Example: During the post-COVID inflation surge, RBI raised repo rates multiple times between 2022–23 to curb excess demand.

2. Fiscal Measures

Fiscal measures involve the use of government spending and taxation to manage inflationary pressures.

• Reduction of Government Expenditure: Cutting down unnecessary public spending reduces demand in the economy.
• Public Borrowing: The government borrows from the public instead of printing new money, thereby reducing excess liquidity.
• Enhancing Taxation: Increasing direct and indirect taxes reduces disposable income and curbs excessive consumption.

Example: During high inflation phases, governments often cut subsidies and impose higher excise/customs duties on luxury goods to reduce demand.

3. Other Measures

a) Short-Term Measures

These aim at immediate relief from inflationary pressures:

• Rationing and Public Distribution System (PDS): Supplying essential goods like rice, wheat, and kerosene at controlled prices through fair price shops.
• Imports of Essential Goods: In times of shortage, importing commodities like pulses, edible oils, or fertilizers helps stabilize domestic prices.

Example: India imported pulses in 2015–16 to control food inflation caused by a poor monsoon.

Public Distribution System (PDS) The Public Distribution System (PDS) is India’s food security network that provides essential foodgrains like rice, wheat, sugar, and kerosene at subsidized prices through Fair Price Shops (FPSs). It is jointly managed by: Central Government (procurement, storage, transportation via FCI). State Governments (allocation within states, ration cards, supervision of FPSs). Evolution 1960s: Started during food shortages, focused on urban scarcity areas. 1992 – RPDS: Expanded to remote, tribal, drought-prone areas. 1997 – TPDS: Targeted poor families (BPL vs APL). 2000 – Antyodaya Anna Yojana (AAY): For the “poorest of the poor” with highly subsidized food (₹2/kg wheat, ₹3/kg rice). Coverage later expanded to 2.5 crore families. 2013 – NFSA: Legal right to food, covering two-thirds of the population.

 

b) Long-Term Measures

These address structural causes of inflation:

• Accelerating Economic Growth: Increasing production of wage goods like food grains and housing reduces supply bottlenecks.
• Promoting Savings and Investment: Encouraging savings reduces current consumption, while higher investment expands future productive capacity.

Example: Green Revolution in India (1960s) was a long-term strategy that boosted food supply and helped control chronic food inflation.