Abstract:
The paper examines the impact of recent inflation and financial shocks on the
vulnerable, and explores policy design to reduce both future shocks and vulnerability
to shocks. Inflation affects the typical savings cum pension portfolio and the specific
consumption basket of the old, as prices of services rise compared to manufactured
goods. Money illusion and habit, which tend to increase with age, aggravate the
psychological trauma associated with inflation. The decline of traditional sources of
social security marginalizes those without savings, in the context of sustained ruralurban
and international migration. Trends determining inflation—domestic and
global, institutional change, and greater openness explain why inflation has been
moderate in India, compared to other emerging markets. Since the polity is averse to
high inflation, and commodity price shocks are moderating, high inflation will not
persist. But the shocks demonstrate the importance of food price inflation for
aggregate inflation in populous South Asia. Therefore improvements in agricultural
productivity, with supportive buffer stock, fiscal and monetary policy are critical to
lower the level of chronic inflation. Regulatory changes to reduce excessive risktaking
in financial markets and the aggravation of inflation from speculation are
examined. Finally, other policy measures to improve security for the old and keep
them an active, vital part of the community are drawn together.
