Inflation in India for UPSC Examination

Inflation in India , Why in News ? : An article appeared in newspaper “THE HINDU” with a title “Reinforcing RBI’s Accountability”

What is Inflation ?

In simple terms Inflation means “general rise in price of goods and services”. By the term general, we mean if the price of one good has gone up it is not inflation, it is inflation only if the prices of most goods have gone up. The opposite of inflation is deflation which means a fall in the general level of prices.

Types of Inflation

Creeping inflation

If there is annual rise in price upto 3%  is known as Creeping inflation. It is the mildest form of inflation and also known as a Mild Inflation or Low Inflation.

Chronic Inflation

If there is persistence rise in creeping inflation (continues to increase) for a longer period of time then it is often called as Chronic. It can be either Continuous (which remains consistent without any downward movement). If continue for longer period of time might leads to Hyper-inflation.

Hyperinflation

It emerged as a situation where the prices rise at an alarmingly high rate. The prices rise so fast that it becomes very difficult to measure its magnitude. However, in quantitative terms, when prices rise above 1000% per annum (quadruple or four digit inflation rate), it is termed as Hyperinflation.

Galloping Inflation

If found that prices rise by double or triple digit like 30% or 400% or 999% per annum, then the situation can be termed as Galloping Inflation. When prices rise by more than 20% but less than 1000% per annum (i.e. between 20% to 1000% per annum), galloping inflation occurs. Also referred as jumping inflation. India has been witnessing galloping inflation since the second five year plan period.

inflation-in-india-2020

Trotting inflation

It happen when Rate of inflation is moderate somewhere between 3 to 7% , such situation is known as Trotting inflation.

Core inflation

 It is the change in the costs of goods and services but does not include those from the food and energy sectors. This measure of inflation excludes these items because their prices are much more volatile.

Headline inflation

 Headline inflation is a measure of the total inflation within an economy, including commodities such as food and energy prices (e.g., oil and gas), which tend to be much more volatile and prone to inflationary spikes.

Structural inflation

 It is an inflation that occurs because a government pursues an excessively loose monetary policy. That is, if a central bank prints too much money or keeps interest rates too low for too long, the value of each unit of currency drops more than it would simply from increased demand.

Cause of Inflation

Demand-Pull Effect

Demand-pull effect in such as ways that as wages increase within an economic system (Because of economic growth), people will have more money to spend on consumer goods. This will increase in liquidity and demand for consumer goods results in an increase in demand for products. Thus increased demand, compel companies to raise prices to the level the consumer will bear in order to balance supply and demand.

•             Rise in population.

•             Black money.

•             Rise in income.

•             Excessive government expenditure.

Cost-Push Effect

Cost-push effect states that when companies are faced with increased input costs like raw materials and  wages, they will preserve their profitability by passing this increased cost of production onto the consumer in the form of higher prices. Cost push inflation can be caused by many factors.

Trade Unions one of the major contributor increase costs by demanding a wage increase without increasing productivity. As a result costs of production increase which increase price level further and a wage price spiral starts.

  • Infrastructure bottlenecks which lead rise in production and distribution costs.
  • Rise in Minimum Support Price (MSP).
  • Rise in international prices.
  • Hoarding and black marketing.
  • Rise in indirect taxes.

Change in Exchange Rates

Inflation can also be made worse by country’s increasing exposure to foreign marketplaces or investors. When the exchange rate suffers due to imbalance trade in such a scenario Rupees has become less valuable relative to foreign currency, this makes foreign commodities and goods more expensive to Indian consumers while simultaneously making Indian goods, services, and exports cheaper to consumers overseas.

Monopoly

Lack of competition in the market between firms i.e monopoly power either being a single large firm or due to cartelization, will give price making ability. This will result in higher costs of other firms.

Profit Push Inflation

During a boom too much profiteering by some large firms increase costs of production of other firms often referred as profit push inflation.

Hoarding and Black-marketing

Sometimes artificial shortage (hoarding) or genuine shortage of an essential good can create a generalized increase in costs.

Measures Taken and Proposed by the Government to Control Inflation

Both government and central bank (Reserve Bank) try to tackle inflation with their policies which are known as Fiscal Policy and Monetary Policy respectively.

Governmant

Administrative measures taken by government like strengthening of Public Distribution System also plays a crucial role in curbing inflation.

Fiscal policies correspond to tax related measures taken by government to control inflation (money supply).

RBI

RBI through its various monetary policies limit the money supply by altering rates like CRR, Repo, Reverse Repo etc.

RBI also Function through Monetary Policy Reviews

Inflation in India 2020 UPSC

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Dr. RS Aggarwal
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