Inflation as an Iniquitous Tax

...

A common effect of Inflation Tax is that it levies tax on both investment “income” and interest, against the nominal gains or the nominal interest rate. This means that if a person purchases a bond with a interest rate of 6% and inflation rate worth 4%, he/she will receive the “Real” interest at the rate of 2%.

The main causes for recent rise in inflation can be-

hardening of commodities prices particularly in metals and crude oil, supply-demand mismatch ( first in sugar, then in wheat and pulses), increase in money supply due to large capital inflows, rise in public expenditure.

Following are the suggestions to deal with the challenges of rising inflation-

- Inflation should not be tackled on ''ad-hoc'' basis. While oil exploration should be deepened and widened, and alternate sources of energy should be found, oil consumption by the general public must be minimized. Curtailing, if not abolishing subsidies to POL may be one of the means to curb their rising public consumption.

- Investment is the ultimate solution to the inflation problem. In dealing with inflation we must take an entirely different approach. We have to develop a specific asset mix that will allow our investments to grow at a rate that is greater than inflation over the long run.

- Boosting-up of agricultural sector of the economy. Agriculture has been neglected too long in terms of public and private investment. Planned crop cultivation is necessary to minimise the mismatch between demand and supply of essential agricultural commodities. Planning for short, medium and long-term development of agriculture on scientific basis is very essential not only to raise production but also productivity.

Govt. should also come out with measures to alleviate the misery of farmers. It will help in providing certain benefits to marginal and small farmers. Agricultural Debt Redemption Corporation may be set-up which would buy loans taken by a farmer up to rupees three lakhs from a bank or a cooperative bank against a long-term bond of 10-15 years maturity issued by it. These bonds negotiable and tradable could be used by the receiving bank/ cooperative bank for purposes of statutory liquidity ratio (SLR) and liquidity requirements mandatory under law. The debtor farmer and his guarantor will thus be discharged from his debt. However, he and his guarantor through a respective agreement would over a period of 10-15 years repay ADRC in kind ,i.e., a part of his produce valued at the market price ruling at that time or in cash by instalments.

- Strengthening Public Distribution System (PDS) and involving state governments in maintaining price stability.

- Govt. should be vigilant about the quality as well as quantity of capital inflows. It is time an efficient machinery is set-up to monitor how much of these capital inflows are ''hot money'' and detect whether laundered and speculative money is entering the money and capital markets under different 'labels'.

- Monetary policy alone can't curb inflationary pressures. Fiscal policy should work in tandem with it. Govt. should curtail its profligacy in spending on non-productive activities. Political considerations should give place to pragmatism. If the governance is committed and efficient, inflation can be controlled by the government. The changes Monetary policy regime of the last two years mark a step towards greater policy transparency and predictability, both of which should help in policy transmission and hence monetary policy effectiveness.

- Role of demonetisation is very important and has a major impact on the economy. The Indian govt.'s notification of the inflation target at 4% +/- 2% through to 2021 is a credit positive re-affirmation of commitment to keeping inflation at moderate levels.

- Goods and services tax (GST) which is to be implemented on April 1, 2017, should not exceed its standard rate of 18%, 15.5% being its revenue neutral rate [RTR] as a higher rate will be inflationary

Removing inflation will cause the price of things to stabilize. This makes economics more simple to understand for the average person. When the price of things are stable and so are salaries, people will understand that only with increments in productivity and value will they then get “more” money. There will be progress. Salaries will stop declining as employers will no longer be able to delude people with “increase” salaries at only a slight rate compared to their business growth is.

Finally, there is much corruption in the government. We have elected many representatives who care more about money or power than they do about following the law. I hope this will change as more people understand inflation, and that our leaders need to be held accountable for their actions.

The only way to prevent inflation, as far as I know, is to have an honest government that is not permitted to print endless amounts of money. The best way to do this is to have a gold standard, or something similar, so that the government is forced to put some value behind their paper money.

Inflation is very stealthy. Even when we don’t “see it”, as has been the case for most of the past 30 years, it’s still eating away at our portfolios in much the same way that termites can destroy your home. For that reason, we have to be aware of inflation – and prepared for it – even when we don’t think it’s happening. It is bringing many people back ‘down to earth’, so to speak, forcing them to think about their purchases, their investments, and what is real and what is fluff in their lives. This is actually a spiritual benefit that unfortunately usually requires some pain and deprivation.