INFLATION & MEASURES TO CONTROL INFLATION Inflation reduces the purchase power and causes wages and the

cost of the inputs of production to spiral higher. It makes interest rates higher and financially damages lenders who will be paid back in less valuable currency. This creates an unstable environment for those running and planning business.These effects of inflation are a detriment to the growth of the productive economy. The monetary authority generally seeks to keep prices stable (moderate inflation) and employment at a maximum. This is said to create an environment that maximizes the output of the economy and the quality of life for its citizens. Another characteristic of inflation is its affect on the balance of trade. A weaker currency makes a nation's goods seem cheaper to global buyers and it makes global products appear more costly to local buyers. This results in an increase in net exports. Measures To Control inflation 1) Monetary Measures: With growth of around 4% for the year 2012-2013, demand in the economy was growing faster than capacity to meet such demand. This leads to inflationary pressures. Therefore, reducing the growth of Aggregate demand, should reduce inflationary pressures. Monetary policy is the policy of the central bank i.e. Reserve Bank of India, which is the supreme monetary and banking authority in the country. The RBI may use such methods as the bank rate, open market operations, the reserve ratio and selective controls in order to control the credit creation operation of commercial banks and thus restrict the amounts of bank deposits in the country. This is known as tight money policy. Monetary policy to control inflation is based on the

assumption that a rise in prices is due to a larger demand for goods and services, which is the direct result of expansion of bank credit. To the extent this is true, the central banks policy will be successful. 2) Fiscal Measures It is the policy of a government with regard to taxation, expenditure and public borrowing. It has a very important influence on business and economic activity. introduce new taxes and raise the rates of existing taxes. The purpose being to reduce the volume of purchasing power in the hands of the public and thus reduces their demand. government expenditure should be reduced. This indicates that demand for goods and services will be further reduced. However, there is one important difficulty is this policy. It may be easy to increase revenue in times of inflation when people have more money income, but difficult to reduce public expenditure. public debt, i.e., the debt of the government may be managed in such a way that the supply of money in the country may be controlled. The government should avoid paying back any of its previous loans during inflation so as to prevent an increase in the circulation of money. Similar to monetary measures fiscal measures alone cannot help in controlling inflation and they should be surrogated by monetary, nonmonetary and non-fiscal measures.