4% Inflation Over Long Term

The govt has advised the RBI to maintain long term rate of inflation at 4% while it may move in the overall range of 2% to 6% . The RBI Governor will have explain to parliament what were the reason if it moves beyond 6% or if it moved below 2% at any stage.

The idea is plausible at first sight but my real worry is that if the inflation remains around 4% in long term it will put a great pressure on govt in terms of servicing its long term debt which then will have a greater component of real rate of interest payable i e the difference between the coupon rate and the inflation rate will be larger. This higher real rate of interest which might well be over 3% would be far outstreched  compared what prevails in most of the developed economies. It would prove be a real burden on the exchequer which will in turn lead to taxing public more and more without benefit of tax money being spent for their welfare.

Krishna Khandelwal

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