Inflation in India: Causes, Impact, and Government Measures

Inflation is the biggest economic issue which India is currently facing. Inflation impacts purchasing power, economic stability, and growth as a whole. Its causes, consequences, and government measures to limit inflation need to be understood in order to realize its impact on the Indian economy. Below is an informative introduction to inflation in India, main reasons for inflation, its impact on various sectors, and the measures taken to limit it.

What is Inflation?

Inflation is the rate at which the general price level of goods and services is increasing and decreasing the purchasing power of money. A little inflation can't be prevented in a developing economy, but excessive inflation is the cause of economic unrest. Inflation can be measured by numerous indexes, such as:

Consumer Price Index (CPI): It is measuring retail inflation through recording price movement in consumer products and services.

Wholesale Price Index (WPI): Captures price change at the wholesale level prior to individuals' consumption of goods.

GDP Deflator: Captures inflation in terms of a change in the general price level of domestically produced goods and services.

Causes of Inflation in India

Indian inflation is caused by a number of factors such as demand-supply mismatches, increase in the cost of production, and international economic forces. The key causes are:

1. Demand-Pull Inflation

When the demand is more than the supply of goods and services, prices rise. This usually happens because:

More consumer expenditure driven by increasing incomes and economic growth.

Increased government expenditure on social welfare schemes and construction projects.

Expansionary monetary policy which results in more money supply in the economy.

2. Cost-Push Inflation

Increase in cost of production compels companies to raise prices. This is because:

Increased wages and labor expenses.

Increase in raw material prices, i.e., metals and fuel.

Disruption in supply chain and increased transport cost.

3. Food Price and Fuel Price

India is a rural country, and food production inflation leads to direct inflation. The causes of food price inflation are:

Drop in farm output because of bad monsoons.

Bottleneck in inventory build-up and supply chain disruption.

Higher transport cost due to increased fuel price.

Volatility of fuel prices caused by volatility in the international price of crude oil directly affects Indian inflation.

4. Imported Inflation

India is dependent upon crude oil, electronics, and other imports. If the import price rises as a result of a rise in international prices or due to devaluation, domestically prices rise.

5. Fiscal Deficit and Government Expenditure

Government borrowing and overspending lead to inflation since the economy is filled with excess money. Government creating money to fund deficits leads to an availability of excess liquidity that increases prices.

Impact of Inflation in India

Inflation is good and bad in equal measures. Even though moderate inflation stimulates economic growth, excessive inflation is very much a problem:

1. Less Purchasing Power

High inflation lowers the purchasing power of money, increasing the cost of necessities for consumers, particularly those who have fixed incomes.

2. Reduction in Savings and Investments

Actual rates of return on saving fall during high inflation, which discourages individuals from saving. It can also reduce investment in the financial markets.

3. Increased Cost of Borrowing

To control inflation, Reserve Bank of India (RBI) increases interest rates, which makes borrowing costly for companies and individuals. It can slow down economic growth and industrial growth.

4. Economic Uncertainty

Unstable inflation creates uncertainty in business and investment planning, deterring foreign investors and negatively impacting economic stability.

5. Impact on Low-Income Groups

Poor and middle-class families are most adversely hit by inflation as they utilize a greater share of their income on food, fuel, and housing.

Government Actions to Tame Inflation

RBI and government actions employ a variety of monetary and fiscal instruments to tame inflation. These instruments are used to stabilize prices in harmony with economic growth.

1. RBI Monetary Policies

RBI tames inflation by virtue of its monetary policy:

Repo Rate Adjustments: RBI raises the repo rate (banks' rate of borrowing from RBI) to lower money supply and fight inflation.

Cash Reserve Ratio (CRR) & Statutory Liquidity Ratio (SLR): Increased CRR and SLR decrease liquidity of banks, decreasing money supply in the economy.

Open Market Operations (OMO): RBI sells or buys government securities to control liquidity and inflation.

2. Fiscal Policies by Government

Government uses various fiscal tools to regulate inflation:

Subsidy on Essentials: Giving subsidy on food, fuel, and fertilizers maintains the price at a stable level.

Fiscal Deficit Management: Preventing excessive government borrowings lessens the burden of inflation.

Tax Reforms: Cutting duties on import of essentials and raising duties on export of essentials to ensure demand-supply balance.

3. Supply-Side Policies

Increasing Agriculture Output: Promoting new farming methods, irrigation schemes, and godowns for fixed food prices.

Controlling Imports and Exports: Aligning trade activities such that scarcity or surplus of precious commodities is minimized.

Streamlining Distribution Channels: Strengthening logistics and warehousing capability such that bottlenecks in supply do not occur.

4. Financial Awareness and Inclusion

Sensitizing people to inflation and financial planning.

Creating financial consciousness to instill more responsible investment and savings behaviors.

Increasing electronic payments and banking facilities to discourage the use of currency, which can help regulate inflation.

Conclusion

Indian inflation is a multifaceted economic phenomenon that is subject to a plethora of factors such as demand-supply gaps, international price movements, and the fiscal policy of the government. While some inflation is inevitable for economic growth, inflation above reasonable limits causes negative effects on purchasing power, saving, and economic stability.

The RBI and the government use monetary, fiscal, and supply-side tools collectively to make inflation control feasible and ensure stability. With induced sustainable growth, increased productivity, and efficient financial policy-making, India can feel a sense of equilibrium between economic growth and price stability. Sustained efforts at cultivation advancements, infrastructure development, and fiscal surveillance will be essential in controlling inflation in the long term.