The Economic Survey 2010-11 makes the fairly obvious point that it is necessary to get the micro-foundations of the economy right for macroeconomic development. Among the key economic problems affecting the micro or unit level is of course inflation, which has remained persistently high for the greater part of this year. The RBI has recently raised its inflation target for 2010-11 by one percentage point to eight per cent. Food inflation, after showing signs of moderating, has climbed back to double digits. One of the key tasks is to understand how inflation, especially food inflation, affects the poor particularly severely. Not all segments are partaking of the fruits of economic growth in the same measure. While the average Indian may be better off — per capita incomes have risen by about 7 per cent — some sections of the people are worse off because their nominal incomes have hardly grown and inflation has negated whatever growth there has been. Moreover, despite the high real GDP growth, many in the bottom quintile of India's rural population, whose expenditure on food accounts for 67 per cent of their spending, are bound to be worse off.
The case for comprehensive policies to support inclusive growth and providing safety nets to the poor has never been stronger. It is certain that the relatively high inflation will accompany the expected high economic growth well into the medium term. In an insightful analysis the Survey points out that some undoubtedly beneficial developments have the unintended consequence of stoking inflation. Financial inclusion is on top of the agenda because it aims at encouraging particularly rural households that hold their savings in cash to deposit them with banks. Once the previously dormant money gets into a bank or a mutual fund, it automatically gets lent to other people, increasing the total money supply in the system. There is evidence from around the world that monetisation of the economy and the roping in of more and more people into formal financial systems add to the pressure on prices. Integration with the global economy can also create inflationary pressures. In India and other emerging economies the purchasing power parity (PPP) is low to begin with, but once industrialisation gathers pace, the PPP correction has to become smaller. This happens partly because of exchange rate changes but more substantially because the prices of basic non-traded goods and unskilled labour that ruled low catch up with the prices in the developed world.
