30-07-2012, 04:21 PM
Impact of Inflation on Growth Rate in India
Impact of Inflation on Growth Rate in India.docx (Size: 55.34 KB / Downloads: 48)
INTRODUCTION
This project seeks to examine the relationship between inflation and GDP growth rate in India. The relationship between inflation and growth remains a controversial one in both theory as well as in empirical evidences. There is a contrasting opinion between the structuralists and monetarists which has led to this debate. The structuralists believe that inflation is essential for economic growth, whereas the monetarists finds a negative relationship between inflation and economic growth.
Literature Review
Following Friedman‘s (1977) Nobel Lecture the theoretical and empirical research on the relationship between inflation and output growth has progresses along two distinct lines. The first line of research starting with Friedman‘s hypothesis that higher nominal inflation raises inflation uncertainty, has tended to investigate the relationships among inflation, inflation uncertainty, growth and growth uncertainty. The second line of research has tended to remain within the traditional macroeconomics and investigate the relation between inflation and growth without reference to inflation uncertainty and growth uncertainty.
Objectives of the Project
The main objective of the project is to know the inflation-growth nexus in developing countries like India. The project examines the relationship between growth and inflation in India. In countries like India where there exist various different classes of people it becomes very necessary to have a balance trade off between higher growth or lower inflation. In the short run, the relationship between growth and inflation is usually positive. Policies that raise output (for example, expansionary fiscal and monetary policies) also raise prices. Inflation is undesirable because it adversely affects some sections of the population (especially the poor). Inflation distorts relative prices, leads to an appreciation of real exchange rates, erodes the value of the financial assets and creates instability.
Methodology
Multiple regression model have been used to establish the relationship between the variables. The variables taken to examine to find out the causes of inflation in India are Bank Credit, REER , Crude Oil Price & FDI Quarterly data between time period of 2007-2011 i.e., for 5years.
From the SPSS Output we obtained the following model summary for the causes of inflation in India.
Suggestion :
The Indian Economy is facing inflation mainly because of shortage and imported inflation. The government has to increase public expenditure so as to improve all types of infrastructure and at the same time it also has to take care of budgetary deficit. The Indian economy needs a structural reform in the agricultural sector so as to tame food-inflation. RBI with its monetary policy has to be very careful as to maintain price stability with a sustained growth in the economy. In the year 2011 RBI Governor Mr. Subbarao was in limelight due to his interest rate hike. It was a necessary measure because maintaining stability is the main objective of the economy. The monetary policy to control inflation is just a short term measure to control inflation. The country needs a significant development in its social and economic infrastructure. Also, the Government should aim at maximising tax revenue. For this purpose the government should not go at increasing the tax rate rather it should aim at increasing the tax-base. The increased Tax-revenue will help the Government to increase its expenditure on structural reform without having an increased budgetary deficit. To promote growth and keep inflation low, the government needs to control budget deficits. This can be achieved by switching public expenditure from consumption to investment, this may be a difficult policy to pursue, especially in a developing country with a multiparty democracy like India.