Alarming situation of Inflation in India

Alarming situation of Inflation in India


In his book “General Theory on Employment, Interest, Money”, British Economist J.M. Keynes said, “When the economy is functioning at full employment, aggregate supply will match aggregate demand.” At this equilibrium, we’ll have ‘General Price Level’. Any increase in this level will cause Inflation and decrease in this level would cause Deflation. Inflation is defined as the rise in general prices of goods and services in an economy over a period of time whereas Deflation is the inverse of the above definition. Deflation occurs when the inflation rate falls below 0%. The concept of inflation has huge consequences on every
economy of the world. Inflation is the cause behind decreasing the purchasing power of an individual. Rise or fall in inflation rates depends on several factors like demand-supply cycle, Government’s Fiscal policy, RBI’s monetary policy, Repo rates, reverse repo rates, bank’s Cash Reserve Ratio, etc. Let’s see these factors in detail and understand the concept and consequences of inflation for our country.
To study Inflation, it is quite imperative to understand the factors responsible behind it. Increase in money supply is one of the primary causes of increase in inflation. For instance, if Reserve bank of India starts printing more money than the available background government securities balancing it, then people would have more money in their hands. But the supply of necessities will remain constant because demand for a commodity is rising but the amount of that commodity in the market remains constant. This
increase in demand leads to an increase in prices of that commodity which ultimately affects the poorest
of the poor. This further causes hunger, malnutrition and poverty in the lower strata of our society. Increased propensity to consume is another factor responsible for increase in the inflation rates in an economy. When people would start consuming more any commodity x, it would directly decrease the supply of that commodity x in the market causing again the tremendous increase in prices of that commodity causing inflation. Third, an increase in the fiscal deficit of the government over a tenure can lead to a great hype in the inflation rates of an economy. If the government is going in loss and has insufficient revenue for investment in the public sector, then the government is seeking to increase the direct and indirect taxes on various commodities which would lead to a general increase in prices of all goods and services across the country.

It is very ironic that high growth and increased investment expenditure can also cause inflation. If we have good infrastructural growth, rise in IT industry, greater employment opportunities, then it would attract migration from rural to urban centers. This can increase the demand of goods and services in the urban metropolitan centers, but again the supply of commodities is less and so, it causes Inflation. Similarly decreased money supply, increased propensity to save by the customers, increase in fiscal consolidation or any recession period that decreases the demand of the public will ultimately lead to the cycle of deflation. There are two kinds of spiral phenomena that can cause various consequences on any economy. First, for instance when inflation increases, workers will demand wages to keep up with the costs of living, that industry would pass the higher labour costs to their customers which would further increase inflation. Another case, if there is a fall in prices, the firm earns lower profit causing reduction in the wages of labourers. People would now have less money so there would be a decrease in demand in the market for goods and services. Hence, causing fall again in the prices of commodities of various kinds giving rise to deflation. So, inflation causes more inflation and deflation would cause more deflation. Therefore, both these upward and downward spirals are dangerous for an economy. There must be a consistency in the inflation rates across the country for better stability and functioning of government.

An independent regulatory body must be present in every country which could monitor and regulate
these inflation rates through its monetary policy weapons. In India, the Reserve Bank of India is the
ultimate regulator of the inflation rates across the nation and it is able to regulate these rates with its
monetary policy weapons such as CRR, SLR, REPO RATES, REVERSE REPO RATES, PSL norms, etc.
According to the RBI, 4-6% inflation is healthy for every economy because this much inflation tends
to maintain good employment opportunities across the country.

Based on speed/quantum inflation can be categorized into 3 types:

4% inflation per annum. It is regarded as safe and essential for job creation and economic growth.

Greater than 4% per annum. Also known as running inflation when inflation rates shift to double digit.

Very high levels of inflation. 20-100% or even 10,000%. As observed in Germany after the Treaty of Versailles due to a monetized deficit. Modern day Venezuela and Zimbabwe due to bad governance by ruling parties resulted into broken economy and shortage of essential commodities. Hence, money becomes quite worthless and new currency may have to be introduced.

In Indian scenario, the concept of inflation seems to be very complex in the present times. Whole world was hit by the covid-19 pandemic in 2020. There was huge scale unemployment and poverty across the nation which affected the middle class the most. People lost their jobs and life went increasingly hard for the daily wage workers in CoVID-19 tenure due to nationwide lockdown. During this period, the Modi government launched the Pradhan Mantri Atma Nirbhar Bharat package of 20 lakh crores in order to stimulate the money supply in the market and RBI adopted a Dovish monetary policy in order to make loans cheaper for everyone. The main aim of this initiative was to increase the demand of commodities by the public but with this came the futuristic problem of inflation. Now, people had more money in their hands so their demand for commodities rose tremendously which would cause the definite problem of inflation in the near future. So, RBI and government has to deal with both inflation and deflation at a single time. On one side, the Government has to take initiatives for tax deduction/exemption to customers to encourage purchase in the time of this pandemic whereas on the other side it has to introduce tax deduction/exemption benefits towards producers in order to decrease the cost of production. Another phenomena relevant these days in India of the hype in prices of petrol/diesel/crude oil. Though it can have various reasons such as India’s international relations, US Rupee strength relation, India’s forex exchange, etc. But its consequences are felt by almost every section of the society because these have become the needs of present generations and such an increase in these prices can vandalise the Indian market. With Greater inflation decreases the purchasing power of the public because people have money in hand but the real value of that money depreciates over time. For instance, if you could buy 1 kg onion for 20 rupees, now for the same 1 kg onion, you have to pay 40 rupees. Therefore, it would have a devastating effect on the hand-to-mouth survivors in our country.

High galloping inflation can also cause huge unemployment in every sector as it was seen in the time of CoVID-19. During war times also, large scale migration is there. Huge expenditure is made on arms and ammunitions whereas the service employees and labourers are left unemployed. In such scenarios, inflation rises to such high levels that people prefer to burn cash over wood because wood cannot be bought even with a room full of cash. People could not even buy a single loaf of bread even with 100,000 dollars because there is not any real value of that cash anymore. The only situation with such a problem is to introduce a new currency by the central bank of that country with proper backend government securities. These are some of the horrendous effects of inflation which can cause vast problems if it is not controlled within time. Therefore, the need of the hour is to effectively monitor the situation at the ground level and give proper decision-making powers to the monetary policy committee of the Reserve bank of India so that effective designing and implementation of these policies would help combat the risk of inflation and maintain stability in the economy of a country.

-By Sanidhya Sharma
Content Writer
Social Journal