Inflation is the rate at which the general level of prices for goods and services is rising and,

consequently, the purchasing power of currency is falling. Central banks attempt to

limit inflation, and avoid deflation, in order to keep the economy running smoothly.

The different measures used for controlling inflation are

shown in Figure-5:

The different measures (as shown in Figure-5) used for controlling

inflation are explained below.

1. Monetary Measures:
The government of a country takes several measures and formulates
policies to control economic activities. Monetary policy is one of the
most commonly used measures taken by the government to control
inflation.

In monetary policy, the central bank increases rate of interest on

borrowings for commercial banks. As a result, commercial banks
increase their rate of interests on credit for the public. In such a
situation, individuals prefer to save money instead of investing in
new ventures.

This would reduce money supply in the market, which, in turn,

controls inflation. Apart from this, the central bank reduces the
credit creation capacity of commercial banks to control inflation.

The monetary policy of a country involves the following:

(a) Rise in Bank Rate:
Refers to one of the most widely used measure taken by the central
bank to control inflation.

The bank rate is the rate at which the commercial bank gets a
rediscount on loans and advances by the central bank. The increase
in the bank rate results in the rise of rate of interest on loans for the
public. This leads to the reduction in total spending of individuals.

The main reasons for reduction in total expenditure of

individuals are as follows;
(i) Making the borrowing of money costlier:
Refers to the fact that with the rise in the bank rate by the central
bank increases the interest rate on loans and advances by
commercial banks. This makes the borrowing of money expensive
for general public.

Consequently, individuals postpone their investment plans and wait

for fall in interest rates in future. The reduction in investments
results in the decreases in the total spending and helps in
controlling inflation.

(ii) Creating adverse situations for businesses:

Implies that increase in bank rate has a psychological impact on
some of the businesspersons. They consider this situation adverse
for carrying out their business activities. Therefore, they reduce
their spending and investment.

(iii) Increasing the propensity to save:

Refers to one of the most important reason for reduction in total
expenditure of individuals. It is a well-known fact that individuals
generally prefer to save money in inflationary conditions. As a
result, the total expenditure of individuals on consumption and
investment decreases.

(b) Direct Control on Credit Creation:

Constitutes the major part of monetary policy.

The central bank directly reduces the credit control

capacity of commercial banks by using the following
methods:
(i) Performing Open Market Operations (OMO):
Refers to one of the important method used by the central bank to
reduce the credit creation capacity of commercial banks. The central
bank issues government securities to commercial banks and certain
private businesses.

In this way, the cash with commercial banks would be spent on

purchasing government securities. As a result, commercial bank
would reduce credit supply for the general public.

(ii) Changing Reserve Ratios:

Involves increase or decrease in reserve ratios by the central bank to
reduce the credit creation capacity of commercial banks. For
example, when the central bank needs to reduce the credit creation
capacity of commercial banks, it increases Cash Reserve Ratio
(CRR). As a result, commercial banks need to keep a large amount
of cash as reserve from their total deposits with the central bank.
This would further reduce the lending capacity of commercial
banks. Consequently, the investment by individuals in an economy
would also reduce.

2. Fiscal Measures:
Apart from monetary policy, the government also uses fiscal
measures to control inflation. The two main components of fiscal
policy are government revenue and government expenditure. In
fiscal policy, the government controls inflation either by reducing
private spending or by decreasing government expenditure, or by
using both.

It reduces private spending by increasing taxes on private

businesses. When private spending is more, the government
reduces its expenditure to control inflation. However, in present
scenario, reducing government expenditure is not possible because
there may be certain on-going projects for social welfare that cannot
be postponed.

Besides this, the government expenditures are essential for other

areas, such as defense, health, education, and law and order. In
such a case, reducing private spending is more preferable rather
than decreasing government expenditure. When the government
reduces private spending by increasing taxes, individuals decrease
their total expenditure.
For example, if direct taxes on profits increase, the total disposable
income would reduce. As a result, the total spending of individuals
decreases, which, in turn, reduces money supply in the market.
Therefore, at the time of inflation, the government reduces its
expenditure and increases taxes for dropping private spending.

3. Price Control:
Another method for ceasing inflation is preventing any further rise
in the prices of goods and services. In this method, inflation is
suppressed by price control, but cannot be controlled for the long
term. In such a case, the basic inflationary pressure in the economy
is not exhibited in the form of rise in prices for a short time. Such
inflation is termed as suppressed inflation.

The historical evidences have shown that price control alone cannot
control inflation, but only reduces the extent of inflation. For
example, at the time of wars, the government of different countries
imposed price controls to prevent any further rise in the prices.
However, prices remain at peak in different economies. This was
because of the reason that inflation was persistent in different
economies, which caused sharp rise in prices. Therefore, it can be
said inflation cannot be ceased unless its cause is determined.
Important Measures to Control
Inflation
Some of the important measures to control inflation are as follows:
1. Monetary Measures 2. Fiscal Measures 3. Other Measures.

Inflation is caused by the failure of aggregate supply to equal the

increase in aggregate demand. Inflation can, therefore, be
controlled by increasing the supplies of goods and services and
reducing money incomes in order to control aggregate demand.

ADVERTISEMENTS:

The various methods are usually grouped under three heads:

monetary measures, fiscal measures and other measures.

1. Monetary Measures:
Monetary measures aim at reducing money incomes.

(a) Credit Control:

One of the important monetary measures is monetary policy. The
central bank of the country adopts a number of methods to control
the quantity and quality of credit. For this purpose, it raises the
bank rates, sells securities in the open market, raises the reserve
ratio, and adopts a number of selective credit control measures,
such as raising margin requirements and regulating consumer
credit. Monetary policy may not be effective in controlling inflation,
if inflation is due to cost-push factors. Monetary policy can only be
helpful in controlling inflation due to demand-pull factors.

(b) Demonetisation of Currency:

However, one of the monetary measures is to demonetise currency
of higher denominations. Such a measures is usually adopted when
there is abundance of black money in the country.

(c) Issue of New Currency:

ADVERTISEMENTS:

The most extreme monetary measure is the issue of new currency in

place of the old currency. Under this system, one new note is
exchanged for a number of notes of the old currency. The value of
bank deposits is also fixed accordingly. Such a measure is adopted
when there is an excessive issue of notes and there is hyperinflation
in the country. It is a very effective measure. But is inequitable for
its hurts the small depositors the most.

2. Fiscal Measures:
Monetary policy alone is incapable of controlling inflation. It
should, therefore, be supplemented by fiscal measures. Fiscal
measures are highly effective for controlling government
expenditure, personal consumption expenditure, and private and
public investment.

The principal fiscal measures are the following:

(a) Reduction in Unnecessary Expenditure:
The government should reduce unnecessary expenditure on non-
development activities in order to curb inflation. This will also put a
check on private expenditure which is dependent upon government
demand for goods and services. But it is not easy to cut government
expenditure. Though this measure is always welcome but it becomes
difficult to distinguish between essential and non-essential
expenditure. Therefore, this measure should be supplemented by
taxation.

(b) Increase in Taxes:
To cut personal consumption expenditure, the rates of personal,
corporate and commodity taxes should be raised and even new
taxes should be levied, but the rates of taxes should not be so high
as to discourage saving, investment and production. Rather, the tax
system should provide larger incentives to those who save, invest
and produce more.

Further, to bring more revenue into the tax-net, the government

should penalise the tax evaders by imposing heavy fines. Such
measures are bound to be effective in controlling inflation. To
increase the supply of goods within the country, the government
should reduce import duties and increase export duties.

(c) Increase in Savings:
Another measure is to increase savings on the part of the people.
This will tend to reduce disposable income with the people, and
hence personal consumption expenditure. But due to the rising cost
of living, people are not in a position to save much voluntarily.

ADVERTISEMENTS:

Keynes, therefore, advocated compulsory savings or what he called

‘deferred payment’ where the saver gets his money back after some
years. For this purpose, the government should float public loans
carrying high rates of interest, start saving schemes with prize
money, or lottery for long periods, etc. It should also introduce
compulsory provident fund, provident fund-cum-pension schemes,
etc. All such measures increase savings and are likely to be effective
in controlling inflation.

(d) Surplus Budgets:
An important measure is to adopt anti-inflationary budgetary
policy. For this purpose, the government should give up deficit
financing and instead have surplus budgets. It means collecting
more in revenues and spending less.

(e) Public Debt:
At the same time, it should stop repayment of public debt and
postpone it to some future date till inflationary pressures are
controlled within the economy. Instead, the government should
borrow more to reduce money supply with the public.

Like monetary measures, fiscal measures alone cannot help in

controlling inflation. They should be supplemented by monetary,
non-monetary and non-fiscal measures.

3. Other Measures:
The other types of measures are those which aim at increasing
aggregate supply and reducing aggregate demand directly.

(a) To Increase Production:

The following measures should be adopted to increase
production:
(i) One of the foremost measures to control inflation is to increase
the production of essential consumer goods like food, clothing,
kerosene oil, sugar, vegetable oils, etc.
(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. For this

purpose, industrial peace should be maintained through
agreements with trade unions, binding them not to resort to strikes
for some time,

(iv) The policy of rationalisation of industries should be adopted as

a long-term measure. Rationalisation increases productivity and
production of industries through the use of brain, brawn and
bullion,

(v) All possible help in the form of latest technology, raw materials,
financial help, subsidies, etc. should be provided to different
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 wage-price spiral. To control
this, the government should freeze wages, incomes, profits,
dividends, bonus, etc.

But such a drastic measure can only be adopted for a short period as
it is likely to antagonise both workers and industrialists. Therefore,
the best course is to link increase in wages to increase in
productivity. This will have a dual effect. It will control wages and at
the same time increase productivity, and hence raise production of
goods in the economy.
(c) Price Control:
Price control and rationing is another measure of direct control to
check inflation. Price control means fixing an upper limit for the
prices of essential consumer goods. They are the maximum prices
fixed by law and anybody charging more than these prices is
punished by law. But it is difficult to administer price control.

(d) Rationing:
Rationing aims at distributing consumption of scarce goods so as to
make them available to a large number of consumers. It is applied
to essential consumer goods such as wheat, rice, sugar, kerosene oil,
etc. It is meant to stabilise the prices of necessaries and assure
distributive justice. But it is very inconvenient for consumers
because it leads to queues, artificial shortages, corruption and black
marketing. Keynes did not favour rationing for it “involves a great
deal of waste, both of resources and of employment.”

Conclusion:
From the various monetary, fiscal and other measures discussed
above, it becomes clear that to control inflation, the government
should adopt all measures simultaneously. Inflation is like a hydra-
headed monster which should be fought by using all the weapons at
the command of the government.