Opinion | Don’t count on the money illusion1 min read . Updated: 17 Sep 2019, 04:16 PM IST
- India’s retail inflation crept up to 3.2% in August, a 10-month high but still below the central inflation target of 4%
India’s retail inflation, which the central bank is mandated to keep within a band of 2-6% on an annualized basis, crept up to 3.2% in August, a 10-month high but still below the central inflation target of 4%. If India’s policy cap on inflation is lifted, many believe, it would be easier to effect an economic revival. Columbia professor Arvind Panagariya, who had served as the NITI Aayog’s first vice-chairman, has suggested in an oped for Times of India that it’s time to revise the target upwards.
There is some merit in the argument that we should let the so-called “money illusion", by which we go by nominal rather than real figures, come into play. Higher inflation typically means that the percentage growth figures reported by businesses look cheerier, even if they are not in inflation-adjusted terms. Inclines on sales and profit charts look steeper, stirring up animal spirits. The illusion also helps companies contain their real wage bills, even lower them if need be, since employees usually look at their pay slips without worrying about the inflation-caused erosion in the purchasing power of a currency. A below-inflation pay hike is actually a pay cut, but few realize it. This allows for downward adjustments in bad times.
Yet, for the benefits of a higher rate of inflation, it is important to recall why it ought to be kept low and stable. For one, the money illusion is unfair on those who aren’t savvy enough to see through it. The poor are the worst sufferers of high inflation. For another, a good currency is one whose value is kept predictable over long periods of time, and that’s an achievement not to be trifled with. If our numbers look less rosy, so be it.