Page 206 - DECO402_Macro Economics

Unit-22: Inflation

In selective control measures because of the rising of consumerism, control of consumer credit become Notes
very general. During inflation, by increasing immediate payments on selective basis and reducing the
payment time, consumer credit facilities are cut down. Central bank according to the purpose, may
determine high margin requirements for loans. For controlling undue monetary expansion apart from
directives, moral suasions, publicity, direct actions etc. these selective measures may be used.
Effectiveness of monetary measures depends on the quantity of control used by the central bank and
support extended by commercial banks and other factors of money market. In a developing country
like India, there is lack of most of these factors. That is why monetary policy is less important here.
Apart from this, when inflation happens due to extension of monetised money (for financing of war
or development plans), then fiscal measures are more useful, towards which we will now turn.

2. Fiscal Measures

Since in almost each economy if the world government expenditure has become a big part of group
expenditure, hence government may influence money supply and because of it inflation in an
important manner. For mopping up excess purchasing power from the economy below mentioned
anti inflationary fiscal measures may be used:
a. Public Expenditure: For controlling price rise, government may reduce its expenditure.
This measure will reduce public money from the market and because of this will reduce
demand for goods and services. Reduction in public expenditure must be used carefully as
an anti-inflationary measure. Reduction of security and developmental expenditure of the
government is almost suicidal. Apart from this there is no gain in leaving the projects under
various plans. Hence government must keep the unnecessary expenditure to be minimal.
b. Taxation: Taxes determine the disposable income in the hands of the people. Introduction
of new taxes and increase in rate of taxes at one side, reduces the purchasing power of the
people and at the other side, it creates resources for the government to face inflation. In this
manner, objective of anti-inflationary tax policy should be to reduce disposable income,
which is otherwise spent on consumption. Tax revenue received by the government should
be used for maintaining requirement expenditure.
Government must use a good composition of direct and indirect tax. Income tax, property
tax, expenditure tax etc direct taxes reduce disposable income and create pressure on
demand. Indirect tax, along with extra profit of extensive extension, may also create general
influences. But indirect taxes prove very heavy for fixed income earners who had already
suffered huge loss due to inflation. By introducing merchandise tax or other similar taxes on
luxury goods, this discriminating effect may be corrected. These things are consumed only
by the high income class in the economy. But indirect tax is not useful, because it increases
cost push inflation by increasing the price of the goods.
c. Public Borrowing and Debts: Like taxes, main objective of public debt is to reduce the
excess purchasing power, which if left free, puts an upward pressure on the demand. If
this voluntary borrowing does not create desired results, government may take support of
compulsory borrowing. Compulsory debt, one form of compulsory saving has been used in
Norway, Belgium and Holland.
For stopping the increase of money extension, government must postpone the repayment of
any of its previous debts. Part from this, if it is possible, for reducing the present purchasing
power of the people, it should defer a part of the salary of its employees. When inflation ends
or there is expectation of slump in the economy, deferred purchasing power may be taken
out. Similarly, during inflation, instead of cash payment of pay revision arrears, they must
be transferred to provident fund accounts. During the period of peace, generally compulsory
saving and deferred payments should be postponed.

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