Monday, August 01, 2011

Sticky Inflation In India - Quick Question

This may be a novice economics observation but I am curious to know if the current monetary tightening in India is going to solve the problem of inflation. It is oft-repeated that prices have risen because of supply side issues. The logic of monetary tightening is that it would lower demand, lowering pressure on price. However, if it is supply side constraint, demand may slide down but supply would be further lowered. This would lead to sticky inflation even as growth (proxy for demand) expectation gradually decreases, as we are witnessing today.

There is probably no magic wand, but India need to work on the structurally improving supply by improving infrastructure and eliminating delays and inefficiencies in the system. With government muddled in one crisis (read scam) after another, reform process has come to a screeching halt. 

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