India: Tackling recent surge in inflation... Circa Sep 2010

This is just a continuation of my previous post in Dec 2009 Click Here

As feared in my previous post, the Indian Gov. has tried to hide its impotency against the rising food prices (and inflation in general) behind the innocuous step of monetary policy tightening. RBI has yet again raised the interest rate despite continued failure in taming inflation. But what can the Gov. do other then putting pressure on RBI to play with the monetary policy? Gov. has not done enough to meet the supply side challenges. In fact the food grains are rotting in the depots. The level of wastage is evident from the Supreme court's order to distribute food grain for free if Gov. can't store food grain (Click). This Gov. is trying to solve the supply side challenges through demand side tools. 

Below is an excerpt from my previous post which throws more light on the subject.

"... 

If you can’t prop up supply then reduce demand, sounds just right. However, I call it a pseudo solution as tightening monetary policy might not be an intelligent and effective way to tackle rising food prices.

First reason is the tools used for tightening monetary policy like interest rate, CRR, etc would take a very long time to actually affect drop in demand for food items. The trickle down effect is very slow as food lies far down the chain from where monetary policy starts taking effect.

Secondary reason is that the demand for food is still affected much more by consumption rather than investment. This coupled with the wide rich poor divide means that the major chunk of liquidity lies within the reach of rich few, who would not start eating more just because the cost of capital has gone down. Increased liquidity would have increased overall demand for food if the money would have reached the pockets of wider section of society, especially the ones who are consuming far less than a healthy diet. This is why a tightening of monetary policy may not bring in desired results, although it just might give a picture that the Government is at least doing “something”. Although this “something” will surely prove to be a serious blow to the much needed recovery process after the recent credit crunch.

Thus my request would be not to disturb the monetary policy...."

I believe that the Gov. has run out of all ideas as it shamelessly pursues the course of tightening monetary policy at the expense of our economy in order to fake a war against inflation...

Please read my earlier post below on the subject. (Click)