Inflation, Recession and Conservation PDF Print E-mail
Economics
Written by Shyam Sundar   
Tenergy cost has gone up all over the world which has disturbed economic parameters one way or the other.
Last ten years, India is boasting of high economic growth rate. Everybody is bullish. Government officers, politicians, economists, industry captains, stock brokers, builders, traders, everybody has expressed happiness with economy. As the global community developed confidence in Indian economy, they started investing in India and the foreign exchange reserve has gone up from zero to 270 billion dollars in last 20 years. With such funds available we have seen large construction activity in Idia.
Housing construction has been taken up on massive scale, road construction, airports, industries expansion, educational institutes, hospitals, hotels, shopping malls etc all are expanding. With large funds coming from overseas, interest rates went down and stock market was booming. While all this was happening, the Government indicator of inflation remained low. This indicator is not a true indicator of inflation. It takes into account the prices of some commodities and not all. Though the prices of several fronts were going up like land, housing, several consumer products, hotels etc. the rate of inflation defined by Government was low.
With the industrial growth in India and China, the demand for raw materials and energy has gone up. With growing demand, oil producers got an opportunity to increase oil prices. Since consumption patterns can not be changed easily, the consumption of oil continued inspite of increase in prices. This was interpreted as, that higher oil price can be sustained and prices continued to go up. Since higher oil price has sustained, the price of natural gas and coal has also gone up. All over the world these are the only basic sources of energy. Energy is required by industries for production, for lighting our houses, cooking food, transportation and everything that we can imagine. Growing energy cost and rising demand has led to increase in prices of all commodities and now the Government indicator is showing higher rate of inflation. In fact Government has subsidized several products like fertilizers, petrol, diesel, LPG, Electricity etc. In the absence of inflation would have been much higher.


With higher inflation rate, one class of society is very happy, that is traders. One could be trading in any commodity like sugar, cement, steel, shares, houses etc. The activity is to buy and sell. One always makes some margin in the buying and selling business and that is justified considering the efforts put in. However, while doing trading, at any point of time, there is always some inventory with the trader. With inflation the value of the inventory goes up which is additional profit /income for the trader. With bank finance available at cheap rate this class had an opportunity to make big money in last few years.
However in last one year, alarms have been raised about the inflation. Government has woken up, interest rates have been increased which will reduce the demand and in turn the rate of inflation. Reduction in demand is considered by many as recession. Demand goes down, so the production goes, down prices go down, business volume goes down, growth rate goes down. In the process somebody's income goes down. It is a major challenge for economists to strike a balance between inflation and recession. Every man being selfish, wants to earn more money; therefore he likes inflation in the product that he sells, and he likes the recession in the product that he consumes. For instance a sugar merchant is happy when sugar prices are high and even more happy if steel and cement prices are low so that he can earn more money in sugar trade and build a house at lower cost. Everybody wants inflation in the product of his business and recession in other products. Unfortunately such phenomenon exists only sometimes and not always.
In developing countries like India more industrialization is required; more construction is required to create employment opportunities for people. This will result in inflation and consumption of natural resources. However in developed economies, production is stagnating, which is leading to recession.
If one looks at the availability of natural resources especially geological resources, it is limited. Faster industrialization leads to faster decline of these geological reserves on one side and pinching inflation on the other side. The other menace associated with industrialization is damage to environment, pollution, global warming, ozone layer depletion etc. Besides when the wealth is generated out of geological resources controlled by limited people, the wealth remains accumulated with those limited people; it is not distributed to the masses. To develop a mechanism to distribute the benefits of such wealth generation takes long time. Therefore the rate of withdrawal of geological resources must be controlled by regulatory bodies. Government must work out a plan to conserve the geological resources because once they are exhausted we have no way to regenerate these resources.
Therefore some times it may look like a preferred option to leave in recession to conserve the geological resources available on the planet. Inflation offers an opportunity to some people to make profits quickly but causes hardship to a larger population. Recession creates dullness in the economic sphere, reduces confidence in investment but would conserve the geological resources.
People carry wrong notion that, building more industries will create employment and generally improve the economic condition of the nation. In last ten years we have seen lot of construction, lot of industrial expansion, but simultaneously we have also seen increasing disproportionate distribution of wealth, in the society. This has led to more hardship to people, increase in crime etc. Therefore while creating wealth we need to have a clear and efficient model to distribute that wealth so that all sections of the society are able to share the benefits of economic growth. It should be ensured that some people do not build monopolies in growing economy; because inflation is an outcome of these monopolies. Balance economic model will address the issues of inflation, recession and conservation of resources.

Shyam Sundar