Deflation’s Effects and Its Remedies

When deflation takes place in our economy, it will have different effects on different class of people. Some are benefited as a result of deflation and some are badly affected during this period.

The effects of deflation on different classes of society are as follows:

(I) Debtors and Creditors- During the falling prices debtors lose because when repaying the some amount is borrowed they pay more purchasing power.The creditors naturally gain.
(II) Production- Deflation has very bad effect on production and trade. Falling prices may wipe out the differences between prices and costs, which constitutes the profit of manufacturer and businessmen. To avoid the possible loss, producers and traders reduce their activities during falling prices.
(III) The renter class- People with fixed money incomes gain during falling prices because the purchasing power of their income increases.
(IV) The working class- The purchasing power of wages increases during deflation. Employed worker find their economic conditions improved during such time. But during deflation trade and production reduce and many workers lose their jobs. The main evil of deflation is unemployment.
(V) Social consequences- Deflation has very bad effects on the community. During such times business and industry suffers losses. Employment is reduced and incomes fall. The effects grow cumulatively and ultimately the community reaches a stagnant state recovery from which takes a long time.
Though deflation affects some people favourably and adversely, but the whole economy is shattered by deflation.

Remedies- Neither inflation nor deflation is desirable for the society, so avoiding deflation price level should be kept stable.

There are various measures to control deflation-

• Monetary Measures- Various monetary measures like low bank rate, open market operations, credit control and reduced reserve ratios should be used as Anti deflationary measures. Expansions of bank credit will increase the quantity of money.
• Fiscal Measures- Fiscal measures are a part of budgetary operations under which the government reduces taxes and reallocates the income and wealth of the people. Not only these, the government (I) provides employment to those eligible job seekers (ii) adds to national wealth due to more production, investment and income (iii) counteracts the deficiency of private demand for goods and services by means of an increase in its own demand. Fiscal policy is thus, considered as the most important policy for economic stabilisation.
• Other Measures- To control deflation other measures include (I) price supports programmes (ii) provisions of subsidies (iii) arrangements of easy availability of goods on hire purchase (IV) keeping cost of production under controllable limits (v) fixed pricing of essential inputs like coal, oil, electricity, etc. (Vi) encourage the foreign capital to increase quantity of money.
To sum up, the above measures which should be adopted by the government for controlling the deflation are actually complementary and they should be used simultaneously.