The pursued but that must not go
The Statutory Liquidity Ratio (SLR) was raised to 38.5 per cent in September, 1990 and the bank rate was revised upward to curb excessive liquidity in the recent past but strangely the SLR was reduced to 30 per cent from April 1992, though inflation continued.
As regards selective credit control, the Reserve Bank has relied mainly on three techniques: determination of margin requirements on advances against the security of essential commodities; determination of ceilings on advances; and charging of discriminatory interest rates on certain types of advances.
These measures have not proved effective. In India, inflation is mainly due to excessive deficit financing which has rendered monetary control measures ineffective.
2. Fiscal Policy:
Fiscal policy can be effectively used for checking inflation. In the present situation there is no scope for increasing direct taxes.
On the other hand, a decline in taxes on a number of mass consumption goods is desired. Efforts should be made to avoid deficit financing as far as possible. Above all, measures should be taken to arrest tax evasion.
3. Other Measures:
It is the scarcity of commodities in relation to demand which is a basic factor of price rise. Measures should be taken to increase the supply of essential commodities. At the same time, expansion of public distribution system is needed. In the situation of scarcity, the public distribution system would ensure supplies of essential consumer goods of mass consumption to people at reasonable prices.
The frequent upward revision of administered prices should be stopped. Export promotion has to be pursued but that must not go to the extent of creating domestic scarcities and thus lead to inflationary price rise.