Inflation in India- Causes and Options Essay

INFLATION-CAUSES & OPTIONS Rising inflation is one of the biggest stories of recent weeks and has received a great deal of attention from the media and political parties - Inflation in India- Causes and Options Essay introduction. At the same time inflation is an economic problem that the average person meets on a daily basis in terms of higher prices particularly of food products. It is sustained rise in the general level of prices of goods and services over a certain period. In simple words it means too much money chasing too few goods. Recent data shows that the inflation crossed the double digit figure and rose to 10. 6% in May 2010. Food inflation is 16. 44% for the week ended Sep 18th, the 5th straight week for a steady climb! Why are prices rising? A number of factors, many of them are global in nature, but the chief among them, is the rise in the price of oil above $100 per barrel. Petroleum is used to make fertilizer and also as fuel in transportation so naturally when oil prices rise it affects food and other prices as well. Strong growth in big, developing countries like US & China also contributed to inflation by boosting demand for many commodities like cement and steel.

This got transmitted to Indian economy. Finally poor monsoons and severe drought have reduced agricultural output further putting an upward pressure on the prices. A final push this time came from the domestic causes. Government has pumped in additional purchasing power in rural areas through schemes like NREGA and in urban areas, the 6th Pay Commission for the Centre Government employees offering a bonanza of hefty pay-packets [States too thereafter took the cue from the centre and similarly increased the salary of their employee] has given additional purchasing power in the hands of people.

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How is inflation measured? In India there are two broad measures of inflation: the Consumer Price Index (CPI) and the Wholesale Price Index (WPI). Of the two the latter has a higher profile because it is measured more frequently. The WPI is based on the wholesale prices of 435 items ranging from agricultural commodities like wheat, rice, groundnuts etc to manufactured products like steel, cement etc. A single index number is calculated based on those prices and the inflation rate is calculated by comparing the most recent index number with that of a ear ago. It’s base year 1993-94 has been revised to 2004-05. The coverage in terms of number of items included in the basket for computation of the CPI is much less than that of WPI. Inflation basics Inflation may be caused due to several economic factors: •When the government of a country prints money in excess, prices increase as there is too much money in circulation chasing too few goods. •Increase in production and labour costs have a direct impact on the price of the final product. •High taxes on consumer products can also lead to inflation. Demand pull inflation is when the economy demands more goods and services than what is produced. •Cost push inflation or supply shock inflation is when non-availability of a commodity would lead to incre4ase in prices The problems due to inflation would be: •When the balance between supply and demand goes out of control, consumers could change their buying habits, forcing manufacturers to cut down production. •Inflation can create major problems in the economy. Price increase can worsen poverty, affecting low income households. Inflation creates economic uncertainty and is a dampener to the investment climate, slowing growth and finally reducing savings and thereby cutting consumption. •Manufacturers would not have an incentive to invest in new equipment and new technology. •Uncertainty would force people to withdraw money from the Bank and convert it into product with long lasting value like gold. What is the government going to do about inflation? Inflation is a major political concern for the government because of upcoming state elections and a general election soon afterwards.

Inflation and rising food prices in particular tend to hurt the masses the most and therefore is a major issue at election time. The bottom line is that we can expect a range of policy measures to fight inflation. The government has already taken some quick steps like trying to curb exports in sensitive commodities and reduce the cost of imports. The idea is that exports reduce domestic supply adding to the pressure on prices; therefore the government has already banned the export of cement and non-basmati rice and may ban other commodity exports later.

Similarly cheaper imports help keep prices low and the government has reduced import duties on edible oils as well. Further action may be taken by the RBI: for example raising interest rates which will reduce liquidity – money floating in the system — and the total demand in the economy which will reduce the pressure on prices. Another option is to allow the exchange rate to appreciate (let rupee rise in value against the US dollar). If the rupee rises in value, imports will become less expensive which will help moderate inflation further.

The question remains as to why the government is adopting policies that transfer most of the burden on to the aam aadmi and aggravate inflation. An ideological commitment to neoliberal policies and the belief, right ot wrong, in their ability to put India on the “world stage” may be playing a role. More importantly, the government’s moves seem to favour corporate interests of various kinds. Conclusion There will always be some amount of inflation in a growing economy and this is necessary too, as it has a multiplier effect on growth.

With demand picking up, there will be inflationary pressure which can be moderated by higher production. The management of current inflation requires both supply-side and demand-side approaches. RBI is ever watchful and has been swift enough to take timely monetary action to contain inflation without hurting growth momentum. Monetary policy has addressed the demand with a gradual, calibrated set of actions on both interest rates and liquidity management. {Abriya Sultan,LORETO COLLEGE, Kolkata}

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