Double dip recession is already in progress. Sovereign default is imminent, even though I don't believe that developed countries will allow it to happen. USA and European countries are facing unprecedented situation to handle the economic situation. Under these situation developing countries are only hoping that it does not get worse to avoid the effect due to globalized economy.
Already BRIC countries are facing GDP growth slowdown, even though its very high in comparison to developed nations, but that is not sufficient to manage the economic welfare of the huge population and remove poverty. During the last decade of boom, income has consistently risen above 10%, which was taken granted by the people and forcibly govt had to increase the salary of the public servants. Recently the WSJ published the IIP data of India which has consistently declined as compared to the last year. This was expected due to uncertain global economic conditions and much more than that due to rapid increase in the interest rate by Reserve Bank of India (Indian central bank).
RBI has consistently raised the repo and reverse repo rate for 12 consecutive time. During the last quarter, RBI clearly specified their main aim of reducing the inflation from current ~10% to about 5%. The more worrying fact about the current inflation figure is that during survey expected inflation is 12% which is going to further worsen the situation. The higher expected inflation will make people to spend more now than save money for future use. The more supply in money will cause further inflation. Hence it is expected that RBI will stick to its main agenda in near future to remove the uncertain economic condition by taming the inflation.
WSJ came up with a very surprising argument regarding the rising inflation. It said that inflation is caused by increase in student enrollment in rural area. Although enrollment and literacy has increased in last few decades but inflation is problem of last few years only. Government sponsored schools have also increased and Right to Education have also helped to increase the enrollment. Most people in India know that these laws, policy and proposals are only on paper. RTE is almost unimplemented. Regarding enrollment of rural population, the attendance is only on paper. Many time teachers themselves don't come, so expecting student's attendance is not possible. Yes mid day meals have helped increase in student enrollment and their attendance.
More prominent reason is probably that the NREGS which gives guaranteed work for 100 days with minimum fixed wage. This must have saved lot of exploited people who were earlier living in a very poor condition. It must have raised the minimum wage which caused other wages also to rise and hence raising the production cost in rural areas. Also, the wages are linked to inflation which will further cause inflation. One most important factor which is not accounted during the discussion of inflation is the role of illegal money floating in the economy. The real estate playing the major role in urban inflation. Lot of money supply is coming from corruption which is causing inflation to rise. So does the obscenely high paying jobs of selected few causing high demand.
The inflation control is the highest priority, and rightly so, for the central bank. But removing child labor, making better working and living condition, better health and education while reducing inequality and corruption should be on priority. Although its not under the control of RBI but the government must continue to design policy for better life to the citizens and more importantly implement it properly.
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