Measures to combat inflation can be divided into three categories: Monetary methods, fiscal measures, and other measures.
Monetary measures: Monetary Measures are control of credit, demonetization of currency, issue of new notes. Monetary measures aim at reducing money incomes.
(a) Credit Control:
Monetary policy is one of the important monetary measures. The central bank of the country takes a number of methods to control the quantity and quality of credit. It raises the bank rates, resorts to open market, raises the reserve ratio, and employs a number of selective credit control measures, such as increasing margin requirements and controlling consumer credit for this purpose. However, monetary policy may not be an effective device in controlling inflation, if inflation is caused by cost-push factors. It can only be useful in controlling inflation due to demand-pull factors.
(b) De-monetization of Currency
Another monetary measure to control inflation is to demonetize currency of higher denominations. Such a measure is generally adopted when there is an abundance of black money in the country.
(c) Issue of New Currency:
The most extreme monetary measure is the issue of new currency replacing old currency. Under this system, new notes are exchanged for a number of notes of the old currency. The value of bank deposits is also determined accordingly. This measure is adopted when there is an excessive issue of notes and there is hyperinflation in the country. It proves to be very a effective measure. But is inequitable as its hurts the small depositors the most
Fiscal Measures
Monetary policy alone is not capable of controlling inflation. Fiscal measures should, therefore, supplement the monetary policy. Fiscal measures are effective for controlling consumption expenditure, government expenditure, and private and public investment. The principal fiscal measures include:
(a) Reduction in Unnecessary Expenditure:
The government should reduce unnecessary expenditure on non-development activities in order to control inflation. This will restrict private expenditure which depends upon government demand for goods and services. However, it is not easy as it appears to cut government expenditure.
(b) Increase in Taxes:
To cut personal consumption expenditure, it requires the increases in the rates of personal, corporate and commodity taxes and even new taxes may be levied, but the rates of taxes should not be so high as to discourage saving, investment and production. The tax system ought to provide encouragement to those who save, invest and produce more. In order to raise more revenue, the government should impose penalties on the tax evaders. Such measures may be effective in controlling inflation. To expand the supply of goods within the country, the government should bring down import duties and raise export duties.
(a) Credit Control:
Monetary policy is one of the important monetary measures. The central bank of the country takes a number of methods to control the quantity and quality of credit. It raises the bank rates, resorts to open market, raises the reserve ratio, and employs a number of selective credit control measures, such as increasing margin requirements and controlling consumer credit for this purpose. However, monetary policy may not be an effective device in controlling inflation, if inflation is caused by cost-push factors. It can only be useful in controlling inflation due to demand-pull factors.
(b) De-monetization of Currency
Another monetary measure to control inflation is to demonetize currency of higher denominations. Such a measure is generally adopted when there is an abundance of black money in the country.
(c) Issue of New Currency:
The most extreme monetary measure is the issue of new currency replacing old currency. Under this system, new notes are exchanged for a number of notes of the old currency. The value of bank deposits is also determined accordingly. This measure is adopted when there is an excessive issue of notes and there is hyperinflation in the country. It proves to be very a effective measure. But is inequitable as its hurts the small depositors the most
Fiscal Measures
Monetary policy alone is not capable of controlling inflation. Fiscal measures should, therefore, supplement the monetary policy. Fiscal measures are effective for controlling consumption expenditure, government expenditure, and private and public investment. The principal fiscal measures include:
(a) Reduction in Unnecessary Expenditure:
The government should reduce unnecessary expenditure on non-development activities in order to control inflation. This will restrict private expenditure which depends upon government demand for goods and services. However, it is not easy as it appears to cut government expenditure.
(b) Increase in Taxes:
To cut personal consumption expenditure, it requires the increases in the rates of personal, corporate and commodity taxes and even new taxes may be levied, but the rates of taxes should not be so high as to discourage saving, investment and production. The tax system ought to provide encouragement to those who save, invest and produce more. In order to raise more revenue, the government should impose penalties on the tax evaders. Such measures may be effective in controlling inflation. To expand the supply of goods within the country, the government should bring down import duties and raise export duties.
(c) Increase in Savings:
Another fiscal measure is to increase savings on the part of the people which will reduce personal disposable income, and hence cut personal consumption expenditure. Because of the increase in cost of living, people are not able to save much. Keynes, therefore, favored compulsory savings. For this purpose, the government should float public loans carrying high interest rates, initiate saving schemes with prize money, or lottery for long periods, etc. These measures to increase savings are likely to be effective in controlling inflation.
(d) Surplus Budgets:
Anti-inflationary budgetary policy is an important measure to adopt. The government should get rid of deficit financing and instead adopt surplus budgets.
(e) Public Debt:
Also, the government should stop repayment of public debt and postpone it to some future date till inflationary pressures are under control within the economy. The government should borrow more to reduce money supply with the public. Similar to the monetary measures, fiscal measures alone cannot assist in containing inflation and require monetary, non-monetary and non- fiscal measures to supplement them.
Other Measures:
The other types of measures are those that aim at increasing aggregate supply and reducing aggregate demand directly.
(a) To raise Production: The measures that should be adopted to increase production are:
(i) One of the foremost measures to control inflation is to increase the production of essential consumer goods.
(ii) If there is need, raw materials for such products may be imported on preferential basis to increase the production of essential commodities
(iii) Efforts should also be made to increase productivity. This requires industrial peace through agreements with trade unions Trade unions do not resort to strikes for some time.
(iv) The policy of rationalization of industries should be adopted as a long-term measure.
(v) Latest technology, raw materials, financial assistance, subsidies, etc. should be provided to various consumer goods sectors to increase production.
(b) Rational Wage Policy:
Another important measure is to adopt a rational wage and income policy. Under hyperinflation, there is a. In order to control hyperinflation which is characterized by wage-price spiral, the government needs to prevent wages to rise, control increase in incomes, profits, dividends and bonus, etc. However, such a drastic measure can only be employed for a short period and by displeasing both workers and industrialists. Therefore, the feasible course of action is to connect increase in wages to increase in productivity. This will result in a dual effect that will control wage and at the same time increase productivity.
(c) Price Control:
Price control and rationing is another measure of direct control to contain inflation. Price control implies fixing an upper breaker for the prices of essential consumer goods. The law fixes maximum prices and anybody charging more than these prices is punished by law. However, it is difficult to administer price control.
(d) Rationing:
Rationing aims at distributing scarce consumption goods such as wheat, rice, sugar, kerosene oil so as to make them available to a majority of consumers. However, it causes inconvenience for consumers. Keynes was not in favor of rationing as it involves a great deal of waste of resources and employment."
Thus, various monetary, fiscal and other measures may be adopted to control inflation.
Another fiscal measure is to increase savings on the part of the people which will reduce personal disposable income, and hence cut personal consumption expenditure. Because of the increase in cost of living, people are not able to save much. Keynes, therefore, favored compulsory savings. For this purpose, the government should float public loans carrying high interest rates, initiate saving schemes with prize money, or lottery for long periods, etc. These measures to increase savings are likely to be effective in controlling inflation.
(d) Surplus Budgets:
Anti-inflationary budgetary policy is an important measure to adopt. The government should get rid of deficit financing and instead adopt surplus budgets.
(e) Public Debt:
Also, the government should stop repayment of public debt and postpone it to some future date till inflationary pressures are under control within the economy. The government should borrow more to reduce money supply with the public. Similar to the monetary measures, fiscal measures alone cannot assist in containing inflation and require monetary, non-monetary and non- fiscal measures to supplement them.
Other Measures:
The other types of measures are those that aim at increasing aggregate supply and reducing aggregate demand directly.
(a) To raise Production: The measures that should be adopted to increase production are:
(i) One of the foremost measures to control inflation is to increase the production of essential consumer goods.
(ii) If there is need, raw materials for such products may be imported on preferential basis to increase the production of essential commodities
(iii) Efforts should also be made to increase productivity. This requires industrial peace through agreements with trade unions Trade unions do not resort to strikes for some time.
(iv) The policy of rationalization of industries should be adopted as a long-term measure.
(v) Latest technology, raw materials, financial assistance, subsidies, etc. should be provided to various consumer goods sectors to increase production.
(b) Rational Wage Policy:
Another important measure is to adopt a rational wage and income policy. Under hyperinflation, there is a. In order to control hyperinflation which is characterized by wage-price spiral, the government needs to prevent wages to rise, control increase in incomes, profits, dividends and bonus, etc. However, such a drastic measure can only be employed for a short period and by displeasing both workers and industrialists. Therefore, the feasible course of action is to connect increase in wages to increase in productivity. This will result in a dual effect that will control wage and at the same time increase productivity.
(c) Price Control:
Price control and rationing is another measure of direct control to contain inflation. Price control implies fixing an upper breaker for the prices of essential consumer goods. The law fixes maximum prices and anybody charging more than these prices is punished by law. However, it is difficult to administer price control.
(d) Rationing:
Rationing aims at distributing scarce consumption goods such as wheat, rice, sugar, kerosene oil so as to make them available to a majority of consumers. However, it causes inconvenience for consumers. Keynes was not in favor of rationing as it involves a great deal of waste of resources and employment."
Thus, various monetary, fiscal and other measures may be adopted to control inflation.
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