The African nation Zimbabwe has become the latest victim to runaway or hyperinflation. In the remorseless tide of global economic affairs, a large number of countries have become victims of inflation at galloping rates. Zimbabwe is its latest prey.
Whenever we talk of runaway inflation, a very interesting anecdote comes to mind. What the anecdote says matches with the current condition in Zimbabwe. It is that, once a professor of economics asked one of his most dullard students what was the meaning of runaway inflation. The student stood silent for a few seconds and then blurted out: “Sir! When we go to a market place with a bagful of money and bring only pocketful of commodities, it is runaway inflation…..”
You may think this is possible only in a fiction, but people in Zimbabwe are now carrying plastic bags full of bank notes to buy essentials like bread, butter, cheese and milk for their daily use. Prices of commodities in the marketplace there are rising at least twice or thrice in a matter of 24 hours. After World War II, the prices in Hungary too doubled every 15 hours or so due to hyperinflation. A similar was witnessed in the West during the Great Depression of 1929-45 phase.
This is the result of over-supply of currencies in the market. This directly means drastic erosion of value of the local currency. In fact, deficit financing by way of creating additional money or borrowing can be blamed for hyperinflation. Since this creates a vicious cycle in the economy, getting out of hyperinflation is extremely difficult. It can take years, if not decades. In fact, a A Zimbabwe-like situation had existed in the past in several countries including Germany.
Zimbabwe dollar has practically become useless. Unbelievable it may sound, the Reserve Bank of Zimbabwe’s “One Hundred Trillion Dollar” has become such a useless piece of paper that it can be exchanged for a single US dollar. Currencies of smaller denominations have vanished in Zimbabwe. Way back in 1923, the Weimar Republic of Germany had issued “100 Trillion Mark” banknotes when a severe hyperinflation had set in there. The exchange value of that historic currency was only $1.
Runaway hyperinflation or galloping inflation has never taken place in India, but the vanishing of smaller denomination currencies and coins is a matter of serious concern. We have very few coins of 25 paise and 50 paise circulating in the market now. The 25 paise coin has become a relic of the past and so has 10 paise coin. Currently, we rarely encounter paper currencies of the denomination of one and two rupees. This clearly means that, while India did not face a runaway inflation, the inflationary trend is catching up.
The case of Zimbabwe is something that should sound alarm for the economic policy makers in India. Since the global economy is inter-connected, this development there should be a matter of caution for us. We must take note. We know whenever the US economy catches cold, India sneezes. Hence, we must play safe with our monetary policy by formulating independent policies in ways that the face value of Indian Rupee does not erode. However, the rise in prices of essential commodities that happens to be the direct indicator of erosion of value of the Rupee poses a great threat.
Though the BJP, before coming into power at the Centre, had said Achhe Din Aane Waale Hain…. (better days are coming), it looks like a mirage. The rise in prices of commodities has not faced any resistance from the Indian establishment. Every month, consumer goods have higher price tags. According to the figures released by the Union Ministry of Statistics and Programme Implementation, the inflation rate in India was recorded at 5.01 in May 2015. In November 2013, it had risen to 11.16 per cent. This is alarming. In fact, the inflation rate averaged 8.21 per cent from 2012 until 2015. It is here that the classical definition of money becomes relevant. Let us examine it in the backdrop of Zimbabwe and also think in the context of India where the “Modinomics” is not doing well anymore.
The basic definition of money is: “Money is a matter of functions four medium, a measure, a standard, a store.” In the case of Zimbabwe, we know that as a medium, the local currency has failed as the people there are fast converting their local money into US dollars. In measuring the value of a commodity too, it has failed. Even for a pound of bread, one has to dish out millions. Clearly, as a “standard,” the Zimbabwe dollar has lost its meaning. Money is used in the “store of value” but this too is not the case in that African nation as people can hardly expect any positive return by the way of interest on depositing their “savings” in banks.
Over the last about four decades, we too have noticed how the value of Indian Rupee is consistently getting eroded. Hence, Zimbabwe’s fiscal fiasco must act as an alarm bell for India.
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