Management students need to comprehend the current inflation phenomenon since they are going to market their product in a scenario of constantly rising prices; they must reconcile with falling profit margins due to rising input costs, pay higher inflation-indexed wages and make future strategies factoring in expected inflation. And then, this is not a stand-alone incidence, but is going to recur in the future.

The ?sacrifice ratio? in macroeconomics tells how much growth rate an economy would need to sacrifice in order to achieve a decline in the inflation rate, a classic policy trade-off. Probably inflation control was a priority target of the economic policies then. But now inflation debate has taken a backseat. This could be due to three reasons: one, given the inflation-growth trade-off, policymakers are now targeting growth rate at the risk of persistent inflation, with wishful thinking that high growth will ?trickle down?. Two, after giving up on quick inflation arrest, it?s more suitable to circumvent its mention. Three, they hope to erase this demon of inflation from public mind by diverting public attention to other benign numbers, buying time to exercise the most-needed long-term measures to tackle inflation.

The Economic Survey 2010-11 has indicated that inflation may be 1.5% higher than what would be if the country was not on this growth trajectory. Thus, the reversed ?sacrifice ratio? in India is now acceptance of 1.5% higher inflation in order to keep the growth rate intact. As the ?political business cycle theory? suggests, growth and unemployment are prime targets just before elections leading to a liberal economic policy letting inflation run amock, with tightening policy following immediately after elections to reign in inflation. After several successive rate hikes, ability of monetary policy to tame inflation has become questionable. In fact, RBI seems to have repeatedly fallen behind the curve, thereby creating high interest-costs-prices spiral further feeding inflation.

India seems to experience demand-pull, cost-push, sectoral and structural inflation, the last being most adamant and hence toughest to handle. Demand-side inflation is due to fiscal stimulus, expansionary policies, higher purchasing power, greater marginal propensity to consume, etc. Cost-push or supply-side is due to input-shortage, especially of raw materials, inflation-indexing of wages and bonds, rising interest rates and crude oil prices. In sectoral inflation, the pressure on prices gets transmitted from high-demand to low-demand sectors through intersectoral resource mobility. When inflation gets into the structure of the economy during development process, and several inflation spirals emerge that keep the prices at high levels, the economic policymakers often give up and advocate acceptance of high prices in the future.

Domestic inflation has come mainly from primary articles, especially food, vegetables and fruits, and requires longer-term measures than repo and reverse repo increases. The Budget has tried addressing this and the media is creating public opinion by focusing on agriculture, the biggest employer in India, yet contributing the least to GDP, with smallest growth rate numbers, lowest productivity and hardly any reforms. Priority focus is needed to enhance agricultural productivity and production to avoid future price spikes in India. Innovations are urgently required to make agriculture profitable not only to retain farmers in agro-based activities but also to make rural India the new preferred destination for the dashing youth. India;s favourable demographics and the new bold generation of B-school graduates will complement such effort.

As for oil-fed inflation, it will be a double whammy for the finmin if global crude prices flare up, since giving subsidies or duty waivers will throw fiscal consolidation out of gear, while letting the hike pass on to the consumer may be politically incorrect and also will lead to another inflation spiral. Imported inflation can be kept under check by letting the rupee rise to curtail import bill, including for oil, or improving public transport and starting commercial application of alternate sources of energy, while creating social awareness. Letting the rupee appreciate also runs the risk of falling exports and reversal of the ?carry trade? caused by the interest arbitrage created by high domestic interest rates. But it?s not as if we have a lot of choices. A correct mix of several well-aligned long-term remedies would probably work.

As the Chief Economic Advisor said while releasing the Economic Survey, as various countries and their financial markets get connected to each-other closely, the world becomes more like a single economy and then having several central banks operating within the same economy poses certain challenges. Going forward, with freer cross-border capital flows and some countries being in recession while others overheated, the opposite monetary policies in the these economies will smuggle part of the stimulus given in the former towards the latter, thereby nullifying the monetary actions of both. To avoid such pains, countries may choose to raise international trade barriers, especially during times of mismatching trade-cycles. And to avoid imported inflation, they may aim at self-sufficiency in future. And so should India.

In the corporate world, the HR manager will connect with inflation in ?inflation-indexing? wages, while the finance manager will issue ?inflation-indexed bonds?. The marketing manager?s challenge will intensify, having to push his product at ever rising prices. The operations manager will come under pressure to raise productivity to counter the rising input costs while combating supply-shortage problems. Analytical comprehension of recurring global phenomena like inflation will distinguish the superior fast-track manager from the also-ran type of clerical manager. Management students must ready themselves to combat such phenomena as inflation by a thorough and analytical understanding, innovative foresight and foolproof strategic planning.

The author is guest faculty of economics at Symbiosis, DIMAT-Raipur, IIeBM-Pune, Sadhana SCMLD-Pune and IIPM-Pune

shubhadasabade@hotmail.com