Economic Policies to Control Inflation

2. Fiscal Measures

By fiscal measures we refer to the steps taken by the head of the fiscal system viz., the government. The fiscal measures to control inflation include:

1. Government Expenditure: This is also known as public expenditure. It is well known that in a socialist country like India, the government undertakes several activities ranging from  defense  to welfare activities. All these mean that government pumps in a lot of money into the economy which ultimately adds to the money supply and fuel inflation. During the period of inflation, the money supply is high, the purchasing power of the people is also high and so the private consumption and investment expenditures will be of the high order. If the government also continues to invest heavily then the inflationary spiral will be worsening. To avoid this the government should slowly reduce its expenditure during inflation so that at least to that extent, the money supply in the economy will be reduced. But in practice such a policy is not at all possible as with ever rising prices, the poor and downtrodden needs protection from the inflation and this will be lost if the government reduces its expenditure. However, this is considered as one of the measures to control inflation by combining it with the other measures.
2. Taxation: Taxation is a well conceived measure against inflation. Under this the government will be able to achieve two purposes at the same time. Firstly, it will be able to augment the revenue of the government and secondly it will be able to curb unwanted consumption expenditure of the people by bringing down their purchasing power and disposable income. During inflation the government should increase the taxes so that it can achieve both the purposes mentioned above. Further the government can also design its tax policy in such a way that the lax burden is more on the rich and less on the poor. This is achieved by imposing heavy direct taxes which will directly affect the rich people. By imposing moderate indirect taxes, the government will be able to collect more from those who spend more. The rich as well as poor will be contributing towards the exchequer. However, it is often said that imposition of indirect taxes will only add to the increase in prices, especially when the producers shift the burden of tax to the consumers. But the object of indirect taxes is to curb the consumption of unwanted commodities. Hence, with the direct and indirect axes, the government should be in a position to redistribute the income in the economy which is a must during inflationary period.
3. Public Borrowing: Public borrowing or public debt is one more method of controlling inflation. According to this policy, the government aims at siphoning-off the excess purchasing power in the economy by encouraging people to lead to the government. This can be done either making lending voluntary or compulsory. Under the voluntary lending, the government educates the people of the need to lend to the government especially during the inflationary period. However, sometimes compulsory lending is to be resorted to because, the people may not respond to the calls of the government. Compulsory lending can be different forms. But it is often said that such compulsory lending will affect only the salaried class and not the rich people. In that case, the salaried class is worst affected during inflation and making them to surrender whatever little surplus that they have with them amounts to double taxing them. Further compulsory saving or lending may also encourage people to find ways of evading Such policies. In general, economists have favored only the voluntary saving or lending by the public.
4. Debt Management: Debt management refers to the way in which the government deals with the retirement or repayment of the public debt. This has to be done in such a way that brings down the money supply in the economy. So when there is inflation, the government should retire or refund the debt to the commercial banks by encashing the securities only out of the budget surplus. This will help to curb the commercial banks ability to create credit. But a major problem with this policy is that during inflation budgetary surplus is not so easily created. Alternatively, the central bank can retire the debt by sales of bank ineligible bonds to non-bank investors like insurance companies, savings bank individuals, etc. This will take away the spend-able money from the public thereby reducing the inflationary pressure.   But even this method can fail as the non-bank investors can always refuse to exchange the spendable money for these bonds.
5. Overvaluation of Currency: This is another method used to control inflationary pressure in an economy. According to this method, the value of the currency is revised upwards so that exports will be costlier and imports cheaper. This will help in increasing the stock of domestically produced goods and encourage more imports. This will mean the availability of goods in the country will increase thereby the price level of them will have to come down. But this measure has to be cautiously adopted as it carries with it seeds of deflation.

3. Other Measures

Apart from the measures discussed above, the government can also implement the following policies to control inflation :

1. Increase Output: This policy may appear to be very easy one but in practice this involves several difficulties. To make the producers increase their output, they should be assured of their profit as otherwise they will not be inclined to increase the output. Further the increase in output can be brought about by fuller utilization of the existing resources, prevention and settlement of industrial disputes, updating the technology, lending liberally to expansion and new establishment purposes of the industry, maintaining industrial peace by activating all the machineries of settlement of industrial disputes, etc. Mere increase in output will not bring down the inflation, it has to be followed by increased availability of products for the consumers.     This calls for curbing and punishing black marketing, hoarding and smuggling activities so that the benefits of increased production will be enjoyed by the economy.
2. Wage Policy: This is another important inflation control measure.  This is often misunderstood as wage freeze policy. This means that the government should not stand in the wage increase sanctioned to the employees if their productivity is very high. The   government   can   encourage   the   employees     to     make   voluntary contributions and reduce their expenditure. Simultaneously, through other measures, the government should bring down the cost of living so that the laborers will not demand higher wages. Wage policy cannot be effective unless it is coupled with several other policies.
3. Price Controls and Rationing: This is one of the most popular policies applied in every country while they face inflation. Under this measure, the government should prevent escalation in prices of essential commodities and control the price of other commodities. By resorting to retail and wholesale price maintenance policies the government can strive to bring down the price level. This calls for buffer stock operations as well as efficient demand and supply management of commodities which the country is badly in need of. This is achieved by introducing rationing of essential commodities through well designed public distribution mechanism. All this mean, enormous efforts are required on the part of the government apart from the willing co-operation from the traders and businessmen. In practice it is found that price control and rationing are very difficult to be implemented during inflationary period due to the exploitative and monopolistic attitude of the businessmen and traders. However, with stringent penal measures the government can make this policy effective in controlling inflation in a country.