CONTROL OF DEFLATION

Measures to check deflation are similar to those used to control inflation. However, these measures operate in the opposite direction.

1. Monetary Measures

Deflation can be controlled through a fall in the bank rate, purchase of governmental securities and lowering of cash reserve requirements. This policy, known as cheap money policy, pumps in money supply in the economy through increase in the volume of credit. Various selective control measures can also be used to increase the flow of credit in desired channels. However, easy availability of credit fails to induce the investors to borrow and undertake economic activities, unless demand is pulled up.

2. Fiscal Measures

Fiscal measures are most effective in controlling deflation. The government, on one hand, reduces the tax burden so as leave a larger amount of purchasing power with the public. On the other hand, the government raises its spending on public works programmes such as roads, railways, parks, irrigation works, dams, etc., under its fiscal policy. These programmes will provide employment to those who may be thrown out of jobs in the private sector and push up income and hence demand for the goods and services. The increase in aggregate demand will invite investment in the private sector and lead to further rise in employment. Once employment has started rising, production, employment and income will rise rapidly through multiplier effect. Government may finance its budget deficit through borrowing from banks or public of their idle cash balances. The basic idea of the fiscal policy is to counteract the deficiency of demand by expansion of demand for goods and services.

3. Other Measures

Price support programmes can be used to prevent factor costs and prices from falling below certain levels to control deflation. For this purpose, the government has to secure necessary funds to buy the unsold surplus stock at the fixed support prices. The United States extensively used the price support programmes. Even in India, price support programmes are frequently used in the agriculture sector. Provision of subsidies and easy availability of consumer goods on hire purchase can also stimulate demand to overcome deflationary situation in the economy.


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