04-12-2012, 02:17 PM
Inflation in India economy
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INTRODUCTION
Inflation is defined as a sustained increase in the general level of prices for goods and services. It is measured as an annual percentage increase. As inflation rises, every dollar you own buys a smaller percentage of a good or service.
According to Gregory,’ it is an increase in the quantity of purchasing power’.
Johnson defines inflation,” as the increase in the quantity of money faster than the national output is expanding”.
Inflation in India economy
India after independence has had a more stable record with respect to inflation than most other developing countries. Since 1950, the inflation in Indian economy has been in single digits for most of the years.
In this crisis ridden world, economies around the world are experiencing high bouts of inflation and India is no exception to that. Indian economy is facing the effects of severe inflation in the form of rising food and energy prices. Indian government is either clueless about the cause of this inflation or is pretending to be clueless to fox the people from seeing the true cause of this rise in prices. Moreover, it is trying to divert everyone's attention from the true cause of inflation by creating scapegoats like consumers (high demand), hoarders, speculators, food drought etc. This is an age old trick which all governments use to fool its populace when it embarks on the inflationary path in full speed.
Issues:
» Understand the concept of inflation and its causes.
» Critically analyze the various initiatives taken by the Indian government
and the RBI to address inflation.
» Analyze the significance of Government and Central Bank in controlling
inflation and the possible effect of their initiatives on the economy.
Types of Inflation
A-On the basis of the degree of government control
● Open inflation : - Situation in which no steps are taken to control rising prices. According to Milton, “it is a process in which prices are allowed to rise without any attempt on part of government to control them. Under open inflation goods are distributed through price mechanism. Price mechanism is a situation in which, those people who have large money to spend, buy more goods.”
● Suppressed inflation :- Situation in which rising prices are controlled through measures taken by the government. According to Friedmen, “suppressed inflation is more dangerous than open inflation because of the corrupt officials responsible for administrating price control ,black market raises its ugly head”.
B- On the basis of political conditions
● War time inflation :- In order to meet the war expenses government increases the supply of money. Large proportion of the production is bought by government itself. Relatively small proportion is left to the general public.
● Peace time inflation :- Underdeveloped countries need large resources for economic planning. In order to mobilize resources, government has to resort deficit financing .It leads to inflation which is known as peace time inflation.
C- On the basis of the scope
● Sectoral inflation :- When inflation affects only a particular part of the country or covers only one or two goods like pulses, petrol etc, it is called sectoral inflation.
● Comprehensive inflation :- When inflation is not confined to a given part of the country or a few goods ,but comprise the entire country and all goods ,it is called comprehensive inflation.
D- Some other general types of inflation are
● Creeping inflation :- In this inflation prices rise very slowly. Such an inflation is not only considered beneficial to the economy but is also considered essential to some extent. Some economists are of the view that 3% rise in prices can be called creeping inflation, Appropriate and desirable in the interest of national development.
● Running inflation :- When there is rapid increase in prices in very short period of time it is called running inflation .In this case rate of inflation is between 80 and 100% over a decade. Such an inflation has adverse effect on poor and middle sections of the society.
Causes of Inflation
1. Over- Expansion of Money Supply: Many a times a remarkable degree of correlation between the increase in money and rise in the price level may be observed. The Central Bank (India’s RBI) should maintain a balance between money supply and production and supply of goods and services in the economy. Money supply exceeds the availability of goods and services in the economy, it would lead to inflation.
2. Increase in Population: Increase in population leads to increased demand for goods and services. If supply of commodities are short, increased demand will lead to increase in price and inflation.
3. Expansion of Bank Credit: Rapid expansion of bank credit is also responsible for the inflationary trend in a country.
4. Deficit Financing: Deficit financing means spending more than revenue. In this case government of India accepts more amount of money from the Reserve Bank India (RBI) to spend for undertaking public projects and only the government of India can practice deficit financing in India. The high doses of deficit financing which may cause reckless spending, may also contribute to the growth of the inflationary spiral in a country.
5. High Indirect Taxes: Incidence of high commodity taxation. Prices tend to rise on account of high excise duties imposed by the Government on raw materials and essentials.
6. Black Money: It is widely condemned that black money in the hands of tax evaders and black marketers as an important source of inflation in a country. Black money encourages lavish spending, which causes excess demand and a rise in prices.