Friday, April 22, 2011

The Inflation Conundrum... (Part-3)

"The Global Liaison"

Globalization no longer is a strange word. It has been cursed a zillion times, and still revered for mutual development. World has recently seen the worst financial crisis, still recuperating, but no country can cut itself off from rest of the world, to delimit its effects. Though some countries are adopting protectionist tendencies, but it has been proved time and again, that this will only worsen the situation. Globalization has put the economy of developing countries at times in vulnerable situations, Inflation being one of such many.  

Central banks no longer are in a comfortable position to goad market in the way and direction they want. Earlier, in order to increase the demand, suitable mechanisms were adopted to increase the money supply. As soon as money enters the market, people are in a better position to buy. Calculations are not that simple these days, courtesy "globalization". Now, in a developed country when money supply is increased to increase the demand, the equation becomes quite complex.  Looking at more lucrative offers in developing markets, people tend to invest more in these markets, causing twin problems. One, the policy making country does not get the desired results of increasing domestic demands. Two, the developing country cannot match this inflow surge causing demand increase in the nation without corresponding supply increase, hence resulting in domestic inflation. So, even if the central bank of developing nations are doing nothing to increase the demand, it can increase due to a policy change in any of the other country and further cause inflation. In solving the inflation conundrum, globalization is a puzzle that still has no known existing solution.

Its a general rule of economics that no country should have more than one central bank, as multiple money creation agencies will cause destabilization in economy. Now, world has become a single economy with multiple money creating agencies (central bank of each country), this is bound to cause destabilization in world economy, brunt of which has to be faced more by developing nations like India. This has been realized by most of the countries and therefore platforms like G-20 are taking a center stage and deciding policies as a whole, so that a policy change in one country should not cause problems in others. Its heartening to see India flexing its economic muscles in such platforms and becoming an integral and important part of any such consortium.

It clearly indicates that inflation is a by product of growth and development, but excessive inflation is a matter of concern for India, especially food inflation. Inflation has the power to change governments, and so UPA government will take all possible measures to curb inflation, but solving this enigma is not easy this time. The question remains how much price do we have to pay, or if UPA will pay the price. In Inflation someone has to pay, lets see who pays...

Note: This ends the three part series of inflation conundrum...

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