Home / Money / Personal-finance /  4%: The new inflation target

This is the new inflation target for the Reserve Bank of India (RBI), with a floor of 2% and a ceiling of 6%. Remember that one of the reasons for inflation, or a rise in the prices, is that governments borrow too much to fund expenses.

Economists agree that there is ‘good’ inflation and ‘bad’ inflation. Good inflation is like the home loan you take—it is borrowing to create an asset.

When government borrows to create infrastructure like roads, railways, power plants and spends money on deep-expenditure, long-gestation projects, the investment pays back over the years.

But when governments borrow to fund current expenditure, like salaries or loan waivers, it is like getting into credit card debt for a household.

The 4% price rise works back into the government managing its borrowing programme to keep the revenue deficit down to near zero and the fiscal deficit at around 3%.

Why not let price rise go to zero?

Just look at Japan to see what happens when inflation goes down to zero. It increases the urge to hoard rather than spend money, leading to the danger lower growth, or no growth at all.

Why have a ceiling?

With toor daal prices at over Rs150 a kg, are you seriously asking this?

More seriously, very high inflation hurts the poor, hurts the retired who live on fixed income, causes a redistribution of wealth from savers to borrowers and ends up causing asset bubbles.

The 4% number is the ‘just-right’ inflation target for a growing country like India, as per the central bank and the government. Mature-growth countries tend to keep this target much lower.

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