Inflationary policies

Pic 2: CPI (source: labour department, RBI)

Pic 1: CPI (Source RBI)

When i was young, still in school, i was always troubled by one question. If government controlled printing of money then why do we have some poor people. The government could just print some more money and distribute it. Then everyone will have money and there shall be no poor people.

My father tried to explain to me the concept of inflation and money supply. Giving money to all does not solve the problem as we are only increasing the availability of money but the number of items available to buy are still the same. This only increases the prices and makes the poor people poor again. I could not understand at that time but now can really relate to the same.

The recent move of the government to increase the wage rates under NREGA and link them to consumer price index reminded me of the dilemma illustrated earlier. There does not seem to be any study done by anyone to understand the impact of NREGA on the purchasing power of rural sector. A search on google for such studies did not yield any result.

In order to understand the impact on NREGA on purchasing power of rural sector, one way could be to understand the rise in inflation in agricultural labour sector vis-a-vis city non labour force. There are two different CPI indices for rural sector, one is for a set of people who derive their income from agriculture and another is a for a set of people who derive their income from rural labour.

During the period from 1998-2005, there has not been much of a difference in these indices (Refer Pic 1). Pic 2 gives an idea about the CPI of agricultural labours, rural labours and urban non labour. Inflation in rural economy has been increasing faster than in urban economy, especially over the last 2 years. This should give a fair idea that the social programs being administered by the government are leading to a rise in purchasing power. The impact of which is being felt in the prices of goods being bought by the rural sector. In this scenario linking wages to CPI would only increase the inflationary pressures in rural economy.

Focus of the government should be in raising purchasing power through productivity, through infrastructure development rather than increasing it through wage rises.

However the observations made in this blog only indirect, a detailed study has to be undertaken to understand the impact of NREGA on rural economy.