The myth that inflation is caused by too much money chasing too few goods seems to have met its waterloo in India. We are observing that the goods are adequate in the market and there are no supply side constraints barring a handful of items like onions due to natural causes.
Then why is the inflation continuing to remain high. How is it affecting the common man and the economy as a whole.
It is worth noting that crores of rupees have been injected in the rural population of the country through various poverty alleviation programs. This has resulted in more moneyin their hands. As is well known when the very poor get increased purchasing power in their hands the first items they go and buy are food grains to satisfy their hunger. Gradually they increase their protein food consumption. It is only after meeting this basic demand they then move on to other demands like clothing and shelter.
This has resulted in the demabd for foodgrains, vegetables and meat, poultry, fish etc go up significantly. However it is also a fact that there is no shortage of these in the country. Then why are the prices going up. The reason seems to be the fact that when there is more money in circulation then the per unit value of the rupee tends to fall. Thus more has to be paid for obtaining the same quantity.
This is alright with those sections of the population whose income keeps pace
Thus we are observing that while the food inflation is remaining high the demand for other items is falling. This is because the surplus purchasing power is going a long way to meet the increased demand for food items. In the process there is not much purchasing power left for other items. Therefore except food items there is a drop in demand of other items. With exports down due to recession in USA and Europe there is drop in production and manufacturing sector.
Thus the skewed inflation is creating demand in one sector and depressing overall demand. The result is a drop in the country's GDP growth rate which in the third quarter of 2012-13 has come down to a low of 4.5%, the lowest in a decade.
What is the way out ? A difficult question but one that needs to be addressed. One way seems to be to boost infrastructure projects as they have a spin off effect to other industries also. Second is to invite foreign capital so that investments can be used to create productive assets.