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Virtues of inflation

Inflation is not as bad as it is generally thought to be. A bit of it is actually good for economic health

Doing well with inflation

What is it about inflation that drives people, particularly housewives, so mad? When onion prices crossed ₹50, there were riots outside grocery shops and governments everywhere quaked with fear. Yet many distinguished economists have made their reputations on inflation. Milton Friedman was one of them. Until then, the theories of John Maynard Keynes held sway and the man became as famous as Adam Smith.

Inflation, like whisky, is supposed to be bad for you. But there hasn’t been a year in India since the end of World War II when prices have not gone up. And everyone, including you and me, have done very well out of it.

If inflation is so bad, why is it that most of us have done so well? Prices since the war have gone up between 200 and 600 times, not per cent — and this should have knocked the bottom out of our trail economy, but India- and Indians-have never been as prosperous as they are today. Jobs are going a-begging, hotels and trains are full, everybody is planning an overseas pleasure tour and the stock market is booming.

Before the war, when there was no inflation, you were lucky to get a clerk’s job in the government and all you received was a measly ₹25 - 30. Now your son turns down ₹2 lakh-a-month job and goes back to Harvard. I used to be a student in Bombay and managed to do pretty well on ₹20-25 a month, all that my father could afford. Now the boys receive ₹1,000/month as pocket money. The chawls have given way to posh apartments (though they cost the moon) and you have to wait for month to get one.

When I returned from England after studies in 1952, I stayed at the Taj in Bombay — my firm footed the bill — and I paid only ₹32 a day for a vast room, including four or five enormous meals. Today you cannot get a cup of tea for that price. But is the hotel empty?

Actually, even at ₹20,000 a day you would be lucky to get a good room. And Tatas have done very well out of the Taj and built up a huge hotel empire, supposed to be one of the most prestigious in the world.

Take gold. Before the war, you could buy as much of the stuff you needed for ₹20/tola, which is slightly over 10 gm. But you didn’t have ₹20. Today, it is a thousand times of that. Going by all theories about inflation, nobody should be able to afford it, actually, there is a run on the metal in major towns during Diwali and other festivals and jewelers have to restrict entry and close doors to keep the marauding housewives at bay. If this is inflation, let us have more of it.

On the other hand, take Japan, a very rich country said to be the second or third biggest economy in the world. There the main problem is deflation, not inflation. Going by conventional wisdom, deflation should be good for you. After all, prices are going down all the time and the longer you wait, the cheaper things become. But Japan has been in the doldrums in the last 20 years and the government is actually trying to inflate the economy, exactly opposite of what we are doing in India.

With the kind of inflation we have been having, things should have come to a dead stop in India. But we are now the second fastest growing economy in the world, second only to China. We produce more automobiles than England once did, and will soon produce more refrigerators, more air-conditioners and, of course, more motor bikes than America does. Who says inflation is bad for you?

I have a feeling that a little inflation, like a little castor oil, is good for our economic health. It keeps you on your toes. But how little? Nobody knows. Onions at ₹50 are, of course, a scandal, but what is the use of onions at half a rupee a kilo, if you do not have that half a rupee? And now that we have ₹50, inflated or not, jingling in our pockets, let us make most of it, whatever Keynes and Friedman might say!

This column first appeared in April 2011.