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Unit 11: Control of Inflation and Philips Curve

If we learn to manage technology; profitable technology will follow automatically. To achieve Notes
this, what should government and private enterprise do?
1. Invest primarily in innovation, only incidentally in machines. Indian businessmen think
that better technology means new machines. A machine, particularly an imported one, is
like a banana peel. What any foreigner will sell us will be either obsolete or overpriced.
When he sells, he will see to it that the machine will only give a return marginally above
the cost of capital. Ideas yield several times more. Bill Gates buys ideas, not machines.

2. When it comes to technology, bankers should ask for a share of probable profits not for
guaranteed interest. If you want to lend money on interest, go to a businessman. If a
technologist is your client, get a share of the profits he is likely to make. Our bankers think
technology is risky and trade is safe.
Yet our banks are full of non-performing assets – all of them lend to traditional “safe”
business. On the other hand, if a bank had lent money to Infosys on a profit sharing basis
(and not on interest), it would have made a killing.

3. Respect talented engineers and reward them properly. In India, design engineers are
placed at the bottom of the heap – they are treated as the lowest breed, even among
engineers. Indian industry respects finance managers the most. The attitude must change.
Productive engineers must be put on top.
4. To take an analogy, what finance managers do is similar to import substitution. What
innovative engineers can do is like export promotion. For the former, the horizon is
initially limited, for the latter, the entire universe is the playing field! If an engineer-
oriented company, such as Wipro, has overtaken every traditional business in the country
that is no accident.

5. Demand rural connectivity, not tax concessions: Silicon Valley is not inside any big city
but in the rural hinterland. Instead of spreading themselves in rural areas, businessmen
squeeze into more and more congested and hence, more and more expensive cities.
Then, they go begging for tax concessions, which, like Keynesian pump priming, turn out
to be 98 per cent inflation and only 2 per cent substance. A wise businessmen will demand
from the government not tax concessions but enough connectivity in the rural areas to
make them worth investing in.

6. Start no project without full financial and political closure: politicians love to inaugurate
projects without proper preparation. Result; Projects get bogged down for want of finance
and also due to political opposition. Once the project starts, there should be zero delay.
Does all this look like simple common sense? Try it. It will give you a healthy shock!
When, due to supply bottlenecks, the aggregate output in the economy stagnates or fails to grow
at a rate equal to the rate of increase in the aggregate demand, the result is stagnation plus
inflation, or stagflation, in short form. Stagflation is a paradoxical situation in which sustained
and substantial price increases are accompanied by stagnating output and rising unemployment.
The level of stagflation has often been measured by the so-called “discomfort index,” which is
simple arithmetic – summing up of the unemployment rate and rate of inflation.

Did u know? Stagflation is a fairly recent phenomenon. It emerged in the industrialised
countries in the seventies and has been making frequent bouts since then in these countries.
Stagflation in advanced economies has often affected the development of poor economies.
The severe recession in Europe hit hard several poor economies of the Asian and African
countries as these depended heavily on their uncertain exports of new materials.

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