Inflation in India refers to the situation of the rise in prices of most of the goods and services of daily or common use. These goods and services can be like food, clothing, housing, transport, etc. The inflation rate measures the average change of price in the basket of goods and services over a particular time period. The inflation rate is an indicator of a decrease in the purchasing power of a unit of India’s currency. Inflation is a rate so it is measured in percentage. In India, the inflation rate is measured by the Ministry of Statistics and Programme Implementation.
EFFECTS OF INFLATION
There are various impacts of inflation rate on the economy of the country-
1. Effect on distribution of income and wealth
The effect of inflation in India is felt unequally by the different groups of individuals within the Indian economy or any other economy —some groups of people gain by making a big fortune and some others lose. Debtors, producers, equity shareholders, traders, speculators, businessmen, black marketers, and farmers largely gain from the situation of inflation in India. Whereas creditors, workers, fixed income earners, and bondholders lose in the situation of inflation. During inflation, there is more and more inequality in income distribution thus making the rich richer and poor poorer.
2. Effect on income and employment
Inflation increases the national income of the community as a whole on account of larger spending of income and greater production. Similarly, employment increases due to the effect of increased production caused by inflation. But the real income of an individual fails to increase proportionately due to a decrease in the purchasing power of money.
3. Effect on government finance
During the situation of inflation of India, public expenditure increases as the government are required to spend more and more for administrative purposes and various other purposes. But the rising prices due to inflation reduce the real burden of public debt because a fixed sum has to be paid in installment per period.
4. Effect on growth
A mild level of inflation in India is helpful for economic growth but a high level of inflation is an obstruction in the economic growth of any economy as it raises the cost of development projects. A mild dose of inflation is inevitable and thus desirable in developing economies like India whereas a high rate of inflation lowers the growth rate by slowing down the rate of capital formation and thus creating uncertainty.
MEASUREMENT OF INFLATION IN INDIA
Inflation in India is measured in percentages for the given period. In India, inflation is measured by two main indices- WPI (Wholesale Price Index) and CPI (Consumer Price Index). WPI measures wholesale level price changes whereas CPI measures retail level price changes. CPI calculates the difference in the price of goods and services like food, medical care, education, etc. which Indian consumers buy for use. Whereas commodities and services sold by businesses to smaller businesses for selling further are captured by WPI. This way both WPI and CPI helps in the measurement of inflation.
CAUSES OF INFLATION IN INDIA
1) DEMAND PULL
When demand for a good in the market exceeds its supply the excess demand will raise the price up which is known as demand pull which causes inflation.
2) COST PUSH
When the price of factors of production rises, the cost of production also rises which is known as a cost-push factor, and thus prices go high which causes inflation.
3) DEFICIT FINANCING
Government spending increases beyond what could be financed with the help of the taxation system. In order to be able to spend extra expenditure government resorts to what is known as deficit financing. For instance, it prints money and spends it which adds to the pressure of inflation.
Excess demand is sometimes artificially generated by hoarders. They do not release the goods into the market. This generates excess demand and thus causes inflation.
If the total output of goods is not sufficient to meet domestic demand and foreign demand then exports of goods will create inflation in the domestic economy. So an economy should be self-sufficient and self-reliant in order to avoid inflation.
6) NON ECONOMIC REASONS
At times of natural calamities, the supply of commodities reduces. In present global economy is facing a pandemic known as coronavirus due to which almost all economies have faced the situation of inflation and are and will be experiencing the phase of the great recession. So non-economic factors also cause inflation in India.
INFLATION RATE IN INDIA
RBI expects retail inflation to fall below targeted 4% till the first half of 2020-2021. This is due to coronavirus lockdown posing serious challenges to demand in the Indian economy. India’s retail inflation is on a fall slipping 170 basis points from its peak in January 2020 to 5.91% in March 2020. The wholesale inflation rate measured by WPI stood at 1% in March 2020. In future retail inflation is expected to fluctuate more negatively so a target of 4% is set with 2% bias on either side.
The pandemic of COVID-19 has created a negative effect on various economies all over the globe and it will take time for economies to recover from the situation of inflation.
The inflation rate in India was 5.5% as in May 2019, as per the Indian Ministry of Statistics and Programme Implementation. This represents a huge reduction from the previous figure of 9.6% as of June 2011 annually. The inflation rate in India is usually quoted as changes in WPI and CPI for all goods and services.
METHODS TO CONTROL INFLATION RATE IN INDIA
Mainly it is the work of Central Bank i.e. RBI in India and the central government to control inflation in any economy. The inflation rate in India can be controlled by adopting various methods.
4 main methods to control inflation are as follows
- MONETARY MEASURES
Monetary measures to control inflation rate in India are-
- Credit Control
- Demonetisation of currency
- Issue of new currency
- FISCAL MEASURES
Fiscal measures to control inflation rate in India are as follows-
- Reduction in unnecessary expenditure
- Increase in direct taxes
- Decrease in indirect taxes
- Surplus Budget
- TRADE MEASURES-
Trade measures to control the situation of inflation can be as follows-
- Lowering the import duty
- Ease import license restriction
- Export duty increased
- ADMINISTRATIVE MEASURES-
Administrative measures for controlling inflation are-
- Ration Wage Policy
- Price Control
It is very much important for every economy to control the inflation rate in India as a mild inflation rate promotes economic growth but a high inflation rate in any economy can be very harmful to India as well as for other nations.