Monthly Archives: February, 2013

Steps in Organizing

Steps in Organizing

1. Identification of activities

All the activities which have to be performed in a concern have to be identified first. For example, preparation of accounts, making sales, record keeping, quality control, inventory control, etc. All these activities have to be grouped and classified into units.

2. Grouping of activities

In this step, the manager tries to combine and group similar and related activities into units or departments. This organization of dividing the whole concern into independent units and departments is called departmentation.

3. Classifying the authority

Once the departments are made, the manager likes to classify the powers and its extent to the managers. This activity of giving a rank in order to the managerial positions is called hierarchy. The top management is into formulation of policies, the middle level management into departmental supervision and lower level management into supervision of foremen. The clarification of authority help in bringing efficiency in the running of a concern. This helps in achieving efficiency in the running of a concern. This helps in avoiding wastage of time, money, effort, in avoidance of duplication or overlapping of efforts and this helps in bringing smoothness in a concern’s working.

4. Co-ordination

Relationships are established among various groups to enable smooth interaction toward the achievement of the organizational goal. Each individual is made aware of his authority and he/she knows whom they have to take orders from and to whom they are accountable and to whom they have to report. A clear organizational structure is drawn and all the employees are made aware of it.

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Challenges of HRM in Indian Economy

The job of HRM department in India has never been so challenging. Last decade has witnessed tectonic shift in Job market. From being an employer’s market, it has suddenly turned into employee’s market, especially in the most crucial segment, ie middle management. Globalization and India’s growing stature in the world has seen demand for Indian managers soaring. From the state of plenty, there is a stage of scarcity of the right talent. The biggest challenge is to retain the talent one has so assiduously hunted and trained. The attrition rate has reached alarming proportions. It has reached such proportions that certain segments of Industry are maintaining bench strengths to fill in the sudden gaps due to resignations. In addition, there are following new issues:

1. Globalization

Growing internationalization of business and workforce has its impact on HRM in terms of problems of unfamiliar laws, languages, practices, attitudes, management styles, work ethics and more. HR managers have a challenge to deal with more and more heterogeneous functions and more involvement in employee’s personal life.

2. Corporate Re-organizations

Liberalization has led to large scale reorganization of businesses in terms of expansions, mergers and acquisitions, joint ventures, take overs, and internal restructuring of organizations. In circumstances as dynamic and as uncertain as these, it is a challenge to manage employees’ anxiety, uncertainties, insecurities and fears.

3. New Organizational Forms

Exposure to international business and practices has led to change in the organizational structure and HR policies of the local companies. Take for instance, the hierarchical structure of Indian companies. Suddenly, Indian companies have begun to adopt flat hierarchical management structure. But to implement and grout such fundamental changes in management philosophy of any company is never easy. The challenge for HRM is to cope with the implications of these new relations in place of well-established hierarchical relationships that existed within the organizations for ages in the past.

4. Changing Demographics of Workforce

Changes in workforce are largely reflected by dual career couples, large chunk of young blood with contrasting ethos of work among old superannuating employees, growing number of women in workforce, working mothers, more educated and aware workers etc… Thus, changing demography of workforce has its own implications for HR managers and a true challenge to handle.

5. Changed Employee Expectations

With the changes in workforce demographics, employee expectations and attitudes have also transformed. Traditional allurements like job security, house, and remunerations are not much attractive today. Rather, employees are demanding empowerment and equality with management. Hence, it is a challenge for HRM to redesign the profile of workers, and discover new methods of hiring, training, remunerating and motivating employees.

6. New Industrial Relations Approach

In the changed industrial climate, even trade unions have realized that strikes and militancy have lost their relevance and not many workers are willing to join them and disrupt work. However, the problems faced by workforce now have different dimension for the management. They manifest in the form of increased attrition rate. Unsatisfied employees instead of approaching the management for resolution, often take up the new job. The challenge before the HRM is find ways and means to feel the pulse of employees and address the issues on proactive basis.

7. Renewed People Focus

“Man behind the machine is most important than the machine”. This is an old doctrine of the Armed Forces. However, this doctrine has begun to gain acceptance in the corporate world and thus all out efforts to grab the best talent at whatever cost.

8. Managing the Managers

Managing the managers is most difficult. Armed with inside information, they cannot be lured with rosy promises. They are in great demand too with growth in economy. These are the people who are most mobile, attrition rate being highest for the junior and middle management level. The challenge of HRM is how to manage this tribe?

9. Weaker Section’s Interests

Another challenge for HRM is to protect the interest of weaker sections of society. The dramatic increase of women workers, minorities and other backward communities in the workforce, coupled with weakening of trade unions, has resulted in the need for organizations to re-examine their policies, practices and values. In the name of global competition, productivity and quality, the interests of the society around should not be sacrificed. It is a challenge of today’s HR managers to see that these weaker sections are neither denied their rightful jobs nor are discriminated while in service.

10. Contribution to the Success of Organizations:

The biggest challenge to an HR manager is to make all employees contribute to the success of the organization in an ethical and socially responsible way. Because society’s wellbeing to a large extent depends on its organizations

Organizing – Introduction

Organizing is the function of management which follows planning. It is concerned with combining people, work to be done, and physical resources into a meaningful relationship to achieve organizational goals. All the three resources are important to get results. Therefore, organizational function helps in achievement of results which in fact is important for the functioning of a concern.

 

According to Chester Barnard, “Organizing is a function by which the concern is able to define the role positions, the jobs related and the co- ordination between authority and responsibility. Hence, a manager always has to organize in order to get results.

 

According to Theo Haimann, “Organizing is the process of defining and grouping the activities of the enterprises and establishing the authority relationships among them.  In performing the organizing function, the manager defines departments and assigns activities so that they can be most effectively executed.”

 

In the words of Koontz and O’Donnell, “Organization involves the grouping of activities necessary to accomplish goals and plans, the assignment of these activities to appropriate departments and the provision of authority, delegation and co-ordination.”

 

Organization is the most important function of management, as success of an organization depends on it.  We can say organizing is the process of grouping activities and identifying the responsibilities and achieving co-ordination among them. Thus, organizing is determination or identification of activities, subdividing & grouping these activities, creation of relationship among the working force, delegation of authority for attainment of maximum coordination.

 

The distinguished industrialist of America, Andrew Carnegie has shown his confidence in organization by stating that: “Take away our factories, take away our trade, our avenues of transportation, our money, leave nothing but our organization, and in four years we shall have re-established ourselves.”

 

That shows the significance of managerial skills and organization.

 

Purpose of Organizing

 

The purpose of an organization structure is to establish a form so that they may better work together to achieve the enterprises objectives. To establish a formal system of roles that people can perform means that the purpose of organizing is.

  • Grouping of activities is necessary to attain objectives
  • The assignment of each group to a manage with authority necessary to supervise it
  • Creating coordination horizontally and vertically in the enterprise structure

 

Thus its purpose is to create a clear environment so that everyone knows as who is  to do what, who is responsible for what results, to remove obstacles to performance caused by confusion and ensure certainty of assignment, to create an  environment to achieve the efficiency of people towards the accomplishment of organization goals.

Centralization and Decentralization

The terms centralization and decentralization, however, are used to give various connotations. The semantic variations range from administrative, physical and functional centralization to decentralization.

 

Centralization and decentralization describe the manner in which decision-making responsibilities are divided among managers at different levels of managerial hierarchy.

 

Centralization is said to be a process where the concentration of decision making is in a few hands. All the important decision and actions at the lower level, all subjects and actions at the lower level are subject to the approval of top management. According to Allen, “Centralization” is the systematic and consistent reservation of authority at central points in the organization. The implication of centralization can be:

 

  1. Reservation of decision making power at top level.
  2. Reservation of operating authority with the middle level managers.
  3. Reservation of operation at lower level at the directions of the top level.

 

Under centralization, the important and key decisions are taken by the top management and the other levels are into implementations as per the directions of top level. For example, in a business concern, the father & son being the owners decide about the important matters and all the rest of functions like product, finance, marketing, personnel, are carried out by the department heads and they have to act as per instruction and orders of the two people. Therefore in this case, decision making power remain in the hands of father & son.

 

On the other hand, Decentralization is a systematic delegation of authority at all levels of management and in all of the organization. In a decentralization concern, authority in retained by the top management for taking major decisions and framing policies concerning the whole concern. Rest of the authority may be delegated to the middle level and lower level of management.

 

The degree of centralization and decentralization will depend upon the amount of authority delegated to the lowest level. According to Allen, “Decentralization refers to the systematic effort to delegate to the lowest level of authority except that which can be controlled and exercised at central points.

 

Decentralization is not the same as delegation. In fact, decentralization is all extension of delegation. Decentralization pattern is wider is scope and the authorities are diffused to the lowest most level of management. Delegation of authority is a complete process and takes place from one person to another. While decentralization is complete only when fullest possible delegation has taken place. For example, the general manager of a company is responsible for receiving the leave application for the whole of the concern. The general manager delegates this work to the personnel manager who is now responsible for receiving the leave applicants. In this situation delegation of authority has taken place. On the other hand, on the request of the personnel manager, if the general manager delegates this power to all the departmental heads at all level, in this situation decentralization has taken place. There is a saying that “Everything that increasing the role of subordinates is decentralization and that decreases the role is centralization”. Decentralization is wider in scope and the subordinate’s responsibility increase in this case. On the other hand, in delegation the managers remain answerable even for the acts of subordinates to their superiors.

 

Implications of Decentralization

  1. There is less burden on the Chief Executive as in the case of centralization.
  2. In decentralization, the subordinates get a chance to decide and act independently which develops skills and capabilities. This way the organization is able to process reserve of talents in it.
  3. In decentralization, diversification and horizontal can be easily implanted.
  4. In decentralization, concern diversification of activities can place effectively since there is more scope for creating new departments. Therefore, diversification growth is of a degree.
  5. In decentralization structure, operations can be coordinated at divisional level which is not possible in the centralization set up.
  6. In the case of decentralization structure, there is greater motivation and morale of the employees since they get more independence to act and decide.
  7. In a decentralization structure, co-ordination to some extent is difficult to maintain as there are lot many department divisions and authority is delegated to maximum possible extent, i.e., to the bottom most level delegation reaches. Centralization and decentralization are the categories by which the pattern of authority relationships became clear. The degree of centralization and de-centralization can be affected by many factors like nature of operation, volume of profits, number of departments, size of a concern, etc. The larger the size of a concern, a decentralization set up is suitable in it.

 

Benefits of Centralization

1. Facilitating Personal Leadership. Personal leadership can be a potent influence in the success of a small organization and during its early growth stages. The success and survival of the small, young enterprise in the competitive market depends upon aggressiveness, singleness of purpose, and flexibility. Under a talented and dynamic leader, centralization in small organization may result in quick decisions, enterprising and imaginative action, and high mobility.

 

2. Providing Integration. Certain amount of centralization is necessary to unify and integrate the total operation of the enterprise. Some sort of central direction is required to keep all parts of the organization moving harmoniously together towards a common objective. Thus, it acts as a binding force on the various parts of the organization.

 

3. Uniformity of Action Centralization brings uniformity in all actions in the organization. Thus, to the extent that the organization wishes all its units to do the same thing in the same way or the same time, there must be centralization of appropriate decisions.

 

4. Handling Emergencies. When emergency decisions affecting all the units of the organization are to be taken, centralization is necessary. The more acute emergency, or the more acute competition requires greater centralized decision-making.

 

5. Other Benefits. Besides, centralization minimizes duplication of work and wastages requires easier control, and makes communication easier.

 

However, these advantages of centralization are limited in certain circumstances and particularly in smaller organizations. A stage comes when decentralization becomes desirable to achieve its advantages and where the limitation of centralization come in the way of successful organizational functioning.

 

Benefits of Decentralization

1. Reducing Burden to Top Executives. Decentralisation is necessary for solving the problems of expanding organisations. It is the means by which the chief executive can extend his leadership over a giant organisation, when the chief executive makes operating decisions and with problems of immediate urgency, he finds it almost impossible to adopt the relaxed and contemplative point of view necessary for planning and thinking ahead. Decentralisation relieves this pressure on the chief executive an provides him time to think for the future and to make plans accordingly.

 

2. Facilitating Diversification. Decentralisation can facilitate the growth and diversification of product lines. Divisionalization facilitates diversification an former is successful under decentralisation. For under decentralisation, each product line is treated as separate unit and proper emphasis on all important matters such as present position, future prospects, an comparative efficiency, can be given.

 

3. Ensuring Marketing Innovations. Customers require satisfaction in respect of supply of qualitative products, regularity of supply, and at cheaper rates. Marketing innovations ensure better customer satisfaction. Each organisation has to carry on these marketing innovations for its existence and growth. In decentralized organisation structure, higher level people get much time for the creativity and innovations. The impact of decentralisation on both product and market has proved by the various organisations.

4. Motivating Mangers. Various research studies have shown that we organisation structure itself can influence the people within the organisation. The extent to which the organisation facilities participation, communication, delegation, mutual interaction, and interdependence, motivates people for higher productivity. Decentralization tends to emphasise those desirable characteristics in whatever type of structure it is found.

 

5. Encouraging Development of Managers. Managers are made, not born and decentralisation is one of the best methods of developing managers in the organisations. Other methods of management development have their own contributions in this field. However, giving managers a management job to do and to delegate authority for decision-making make them more mature and competent and broad-based. The problem of succession is overcome this way and the future growth and success of the organisation are ensured as most organisations find lack of managerial talent a limiting factor in growth. Perhaps, the necessity of management development is one of the compelling reasons for decentralisation.

Hypothesis Testing

A basic fact about testing hypotheses is that a hypothesis may be rejected but that the hypothesis never can be unconditionally accepted until all possible evidence is evaluated.

In the case of sampled data, the information set cannot be complete. So if a test using such data does not reject a hypothesis, the conclusion is not necessarily that the hypothesis should be accepted.

 

The null hypothesis in an experiment is the hypothesis that the independent variable has no effect on the dependent variable. The null hypothesis is expressed as H0. This hypothesis is assumed to be true unless proven otherwise. The alternative to the null hypothesis is the hypothesis that the independent variable does have an effect on the dependent variable. This hypothesis is known as the alternative, research, or experimental hypothesis and is expressed as H1. This alternative hypothesis states that the relationship observed between the variables cannot be explained by chance alone.

 

There are two types of errors in evaluating hypotheses:

Type I error

This occurs when one rejects the null hypothesis and accepts the alternative, when in fact the null hypothesis is true.

 

Type II error

This occurs when one accepts the null hypothesis when in fact the null hypothesis is false.

 

Because their names are not very descriptive, these types of errors sometimes are confused. Some people jokingly define a Type III error to occur when one confuses Type I and Type II. To illustrate the difference, it is useful to consider a trial by jury in which the null hypothesis is that the defendant is innocent. If the jury convicts a truly innocent defendant, a Type I error has occurred. If, on the other hand, the jury declares a truly guilty defendant to be innocent, a Type II error has occurred.

 

Hypothesis testing involves the following steps:

  • Formulate the null and alternative hypotheses.
  • Choose the appropriate test.
  • Choose a level of significance (alpha) – determine the rejection region.
  • Gather the data and calculate the test statistic.
  • Determine the probability of the observed value of the test statistic under the null hypothesis given the sampling distribution that applies to the chosen test.
  • Compare the value of the test statistic to the rejection threshold.
  • Based on the comparison, reject or do not reject the null hypothesis.
  • Make the marketing research conclusion.

 

In order to analyze whether research results are statistically significant or simply by chance, a test of statistical significance can be run

ERG Motivation Theory

Clayton Alderfer has proposed an alternative hierarchy of needs – called the ERG Theory of Motivation. The letters E, R and G stand for Existence, Relatedness and Growth.

 

The below diagram shows ERG theory

 

 

ERG

The existence needs in this theory refers to the physiological and security needs of Maslow. Relatedness needs refers to belongingness and esteem needs. Growth needs refers to both self-esteem and self-actualization needs.

 

Although ERG Theory assumes that motivated behavior follows a hierarchy in somewhat the same fashion as suggested by Maslow, there are two important differences.

 

Firstly, ERG theory suggests that more than one kind of need might motivate a person at the same time. For example, it allows for the possibility that people can be motivated by a desire for money (existence); friendship (relatedness), and an opportunity to learn new skills (growth) all at the same time.

 

Secondly, ERG theory has an element of frustrations-regression that is missing from Maslow’s need hierarchy. Maslow maintained that one heed must be satisfied before an individual can progress to needs at a higher level, for example, from security needs to belongingness. This is termed as satisfaction—progression process. Although the ERG theory includes this process, it also suggests that if needs remain unsatisfied at some higher level, the individual will become frustrated, regress to a lower level and will begin to pursue low level needs again. For” example, a worker previously motivated by money (existence needs) is awarded a pay rise to satisfy this needs. Then he attempts to establish more friendship to satisfy relatedness needs. If for some reason an employee finds that it is impossible to become better friends with others in the work place, he may eventually become frustrated and regress to being motivated to earn even more money. This is termed as ‘frustration-regression’ process.

 

The ERG theory emphasis on the following key points regarding needs:

  • Some needs may be more important than others.
  • People may change their behavior after any particular set of needs has been satisfied.

 

Primary and Secondary Data

Depending upon the sources utilized, whether the data has come from actual observations or from records that are kept for normal purposes, statistical data can be classified into two categories, primary and secondary

Primary and Secondary

Primary Data

Primary data is one, which is collected by the investigator himself for the purpose of a specific inquiry or study. Such data is original in character and is generated by surveys conducted by individuals or research institutions.

Some common types of primary data are:

  • Demographic and socioeconomic characteristics
  • Psychological and lifestyle characteristics
  • Attitudes and opinions
  • Awareness and knowledge: for example, brand awareness
  • Intentions: for example, purchase intentions. While useful, intentions are not a reliable indication of actual future behavior.
  • Motivation: a person’s motives are more stable than his/her behavior, so motive is a better predictor of future behavior than is past behavior.

 

Primary data can be obtained by:

Communication

Involves questioning respondents either verbally or in writing. This method is versatile, since you need only to ask for the information; however, the response may not be accurate. Communication usually is quicker and cheaper than observation.

 

Observation

Involves the recording of actions and is performed by either a person or some mechanical or electronic device. Observation is less versatile than communication since some attributes of a person may not be readily observable, such as attitudes, awareness, knowledge, intentions, and motivation. Observation also might take longer since observers may have to wait for appropriate events to occur, though observation using scanner data might be quicker and more cost effective. Observation typically is more accurate than communication.

 

Personal Interviews

Have an interviewer bias that mail-in questionnaires do not have. For example, in a personal interview the respondent’s perception of the interviewer may affect the responses.

 

Questionnaire

The questionnaire is an important tool for gathering primary data. Poorly constructed questions can result in large errors and invalidate the research data, so significant effort should be put into the Questionnaire

 

Secondary Data

When an investigator uses the data, which has already been collected by others, such data is called secondary data. This data is primary data for the agency that collects it and becomes secondary data for someone else who uses this data for his own purposes. The secondary data can be obtained from journals, reports, government publications, publication of professional and research organization and so on. For example, if a researcher desires to analyze the weather conditions of different regions, he can get the required information or data from the records of the meteorology department.

 

There are several criteria that you should use to evaluate secondary data.

  • Whether the data is useful in the research study.
  • How current the data is and whether it applies to time period of interest.
  • Errors and accuracy – whether the data is dependable and can be verified.
  • Presence of bias in the data.
  • Specifications and methodologies used, including data collection method, response rate, quality and analysis of the data, sample size and sampling technique, and questionnaire design.
  • Objective of the original data collection.
  • Nature of the data, including definition of variables, units of measure, categories used, and relationships examined.

 

 

Research Process

Research process involves six important steps:

Research Process

1. Problem Definition/Identification

The first step in the process is to identify a problem or develop a research question. The research problem may be something the organization identifies as a problem, some knowledge or information that is needed by the organization, or the desire to identify a trend.

If you are working in a company, the problem is assign by the top management; usually you get broad ideas regarding the problem. Then with the broad concept from the top management you define the specific problem statement.

Or if you are doing some research project then you have to identify your problem statement of your own. Remember your problem statement should be specific.

There are three aspects of research problem

  1. The specification of units to be studied
  2. The identification of the particular units within the scope of study
  3. The specification of the kind of information to be sought.

2. Research Proposal

Research proposal are necessary for all business research, it may be the internal proposal or it may be the external proposal. But research proposal is not required in case of research studies for P. hd., or paper presentation as concerned.

A proposal is known as a work plan, prospectus, outline, statement of intent, or draft plan. The proposal tells us what, why, how, where, and to whom it will be done.

The proposal of research is:

  1. To present the management question to be researched and its importance
  2. To discuss the research efforts of others who have worked on related management questions.
  3. To suggest the data necessary for solving the management question and how the data will be gathered, treated, and interpreted.

3. Research Design

A research design is a framework or blueprint for conducting the marketing research project. It details the procedures necessary for obtaining the required information, and its purpose is to design a study that will test the hypotheses of interest, determine possible answers to the research questions, and provide the information needed for decision making.

Conducting exploratory research precisely defines the variables, and designing appropriate scales to measure them are also a part of the research design.

The issue of how the data should be obtained from the respondents (for example, by conducting a survey or an experiment) must be addressed. It is also necessary to design a questionnaire and a sampling plan to select respondents for the study.

More formally, formulating the research design involves the following steps:

  1. Definition of the information needed
  2. Secondary data analysis
  3. Qualitative research
  4. Methods of collecting quantitative data (survey, observation, and experimentation)
  5. Measurement and scaling procedures
  6. Questionnaire design
  7. Sampling process and sample size
  8. Plan of data analysis

4. Data Collection

Once the researcher has decided the ‘Research Design’, the next job is of data collection. For data to be useful, our observations need to be organized so that we can get some patterns and come to logical conclusions. Statistical investigation requires systematic collection of data, so that all relevant groups are represented in the data.

To determine the potential market for a new product, for example, the researcher might study 500 consumers in a certain geographical area. It must be ascertained that the group contains people representing variables such as income level, race, education and neighborhood. The quality of data will greatly affect the conclusions and hence, utmost importance must be given to this process and every possible precaution should be taken to ensure accuracy, while gathering and collecting data.

Depending upon the sources utilized, whether the data has come from actual observations or from records that are kept for normal purposes, statistical data can be classified into two categories, primary and secondary.

5. Data Analysis and Interpretation

Data preparation includes the editing, coding, transcription and verification of data. Each questionnaire or observation form is inspected or edited and, if necessary, corrected. Number or letter codes are assigned to represent each response to each question in the questionnaire. The data from the questionnaire are transcribed or key punched onto magnetic tape or disks, or input directly into the computer. The data are analyzed to derive information related to the components of the marketing research problem and, thus, provide input in to the management decision problem.

6. Report Writing

The entire project should be documented in a written report that addresses the specific research questions identified, describes the approach, the research design, data collection, and data analysis procedures adopted, and presents the results and the major

findings. The findings should be presented in a comprehensible format so that management can readily use them in the decision making process. In addition, an oral presentation should be made to management using tables, figures, and graphs to enhance clarity and impact.

 

 

Stagflation

The word stagflation is the combination of two words Stag from stagnation and flation from inflation. In stagflation both the higher level of employment and inflation are attached. It is therefore, also called “Inflationary recession.” According to Keynesian it occurs due to rise in cost of production or fall of supply.  If the supply goes downward it will certainly affect the price level which will go higher, it will also reduce the employment. This may result the stagflation.

Possible causes of stagflation include short supplies of essential commodities (such as oil) and too fast a rise in money supply (which in turn usually reflects government policy). Stagflation occurred in the 70s and 80s. Economic theory prior to that time regarded the combination as unlikely, if not impossible.

Causes of Stagflation

  • Supply Shock
  • Government regulations

Supply shock is a classic example, let us look at it. A supply shock is an event that suddenly changes the price of a commodity or service. It may be caused by a sudden increase or decrease in the supply of a particular good. This sudden change affects the equilibrium price. As we know supply has inverse relationship with price, so when supply goes down price goes up, causing inflation.

Measures to Control Inflation

As we know Inflation is caused by increase in the number of currency without increasing the amount of stuff. In simple terms, Inflation is MORE money chasing the SAME amount of stuff.

So how do we control inflation? Stop creating money? Reduce the government spending? Stop new money from entering the system? Sell bonds in the market to remove all extra money? Raise Interest Rates?

Let us try and understand this.

The different methods used to control inflation are known as anti-inflationary measures. These measures attempt mainly at reducing aggregate demand for goods and services on the basic assumption that inflationary rise in prices is due to an excess of demand over a given supply of goods and services.

We know that inflation is caused by the failure of aggregate supply to equal the increase in aggregate demand. Inflation can, therefore, be controlled by increasing the supplies and reducing money incomes in order to control aggregate demand.

The various methods to control inflation are given below however the most common ones are Monetary and Fiscal Policies:

1. Monetary Policy

With growth of 3.8%, demand in the economy could be growing faster than capacity can grow to meet it. This leads to inflationary pressures. We can term this demand pull inflation. Therefore, reducing the growth of Aggregate demand, should reduce inflationary pressures.

Monetary policy is the policy of the central bank of the country, which is the supreme monetary and banking authority in a country. The central bank may use such methods as the bank rate, open market operations, the reserve ratio and selective controls in order to control the credit creation operation of commercial banks and thus restrict the amounts of bank deposits in the country. This is known as tight money policy. Monetary policy to control inflation is based on the assumption that a rise in prices is due to a larger demand for goods and services, which is the direct result of expansion of bank credit. To the extent this is true, the central bank’s policy will be successful.

Monetary policy may not be effective in controlling inflation, if inflation is due to cost-push factors. Monetary policy can only be helpful in controlling inflation due to demand-pull factors.

The most extreme monetary measure is the issue of new currency in place of the old currency. Under this system, one new note is exchanged for a number of notes of the old currency. The value of bank deposits is also fixed accordingly. Such a measure is adopted when there is an excessive issue of notes and there is hyperinflation in the country. It is very effective measure. But is in-equitable for its hurts the small depositors the most.

Let us see how increasing the rate can help control inflation

A higher interest rate should also lead to higher exchange rate, which helps to reduce inflationary pressure by

  • Making imports cheaper.
  • Reducing demand for exports and
  • Increasing incentive for exporters to cut costs.

2. Fiscal Policy

It is the policy of a government with regard to taxation, expenditure and public borrowing. It has a very important influence on business and economic activity. Taxes determine the size or the volume of disposable income in the hands of the public. The proper tax policy to control inflation will avoid tax cuts, introduce new taxes and raise the rates of existing taxes. The purpose being to reduce the volume of purchasing power in the hands of the public and thus reduces their demand. A precisely similar effect will be achieved if voluntary or compulsory savings are increased. Savings will reduce current demand for goods and thus reduce the inflationary rise in prices.

As an anti-inflationary measure, government expenditure should be reduced. This indicates that demand for goods and services will be further reduced. This policy of increasing public revenue through taxation and decreasing public expenditure is known as surplus budgeting. However, there is one important difficulty is this policy. It may be easy to increase revenue in times of inflation when people have more money income, but difficult to reduce public expenditure.

During war times as well as during a period of development, it is absolutely impossible to reduce the planned expenditure. If the government has already taken up a scheme or a group of schemes, it is ruinous to give them up in the middle. Therefore, public expenditure cannot be used as an anti-inflationary measure. Lastly, public debt, i.e., the debt of the government may be managed in such a way that the supply of money in the country may be controlled.

The government should avoid paying back any of its previous loans during inflation so as to prevent an increase in the circulation of money. Moreover, if the government manages to get a surplus budget, it should be used to cancel public debt held by the central bank. The result will be anti-inflationary since money taken from the public and commercial banks is being cancelled out and is removed from circulation. But the problem is how to get a budget surplus, which is extremely difficult.

3. Price Control and Rationing

This is the most important and effective method available during war and other critical times particularly because both monetary and fiscal policies are more or less useless during this period. Price control implies the establishment to legal upper limits beyond which prices of particular goods should not rise. The purpose of rationing, on the other hand, is to distribute the goods in short supply in an equitable manner among all people, irrespective of their wealth and social status. Price control and rationing generally go together. The chief objection behind use of this method to fight inflation is that they restrict the freedom of the consumers and thus limit their welfare. Besides, its success depends on administrative efficiency, which in many underdeveloped countries is very low.

4. Other Methods

Another important anti-inflationary device is to increase the supply of goods through either increased production or imports. Production may be increased by shifting factors of production from the production of less inflation sensitive goods, which are in comparative abundance to the production of those goods which are in short supply and which are inflation-sensitive. Moreover, shortage of goods internally may be relieved through imports of inflation sensitive goods, either on credit or in exchange for export of luxury goods and other non-essentials.

A word may be added about the measures to control cost-push inflation. It is suggested that wages, salaries and profit margins should be controlled and fixed through a system of income freeze. Business units may particularly welcome wage freeze. However, wage freeze is not so easy or just, unless trade unions agree to the proposal and there is also freezing of prices. At the same time, the Government should not raise the rates of commodity taxes. Thus, it is difficult to control cost push inflation through controlling wages and other incomes. The best method is to bring a rapid increase in production, which will automatically check prices and wages also.