Comment on the impact of rising inflation on Indian economy
Introduction
Inflation is a situation wherein there are continuous increases in the price level of goods and services in an economy over a period of time. In a lay man language inflation, could be defined as too much of money charged for few goods or products. When generally the price rises, unit of currency buys fewer goods and inflation also reflects on reduction in purchasing power of per unit of money. Inflation is usually calculated by annualised percentage change in a general price index (normally the consumer price index) over time. Apart from this there are other widely used price indices for calculating inflation like Producer price indices (wholesale prices), Commodity price indices, and Core price indices.
India is considered to be the large market that doesn’t have a monetary policy framework. This is one of the main reasons why India mostly faces rise in inflation after the financial crisis. Common factors for inflation are GDP deflator, regional inflation, historical inflation, asset price inflation.
Effects of Inflation:
Inflation affects both the economy of a country and its social conditions, as well as the political and moral lives of its inhabitants. However, the economic effects of Inflation are stated and described below:
Conclusion
Most of the economists today have a low or a steady rate of inflation. Low or negative rate in inflation reduces the hardness of recession by allowing the market to adjust more quickly in a down turn and reduces the trap which prevents from monetary policy from stabilizing. Generally these policies are the authorities for central banks which have monetary control through interest rates, open markets operations, and reserve requirements. Issues which lead to inflation are: optimal inflation rate, money supply and inflation, global trade. Other than this there are several other factors which determine impact of inflation in India they are: demand factors, supply factors, domestic factors, external factors, etc.Inflation is basically targeting the general frame work which is the new way in opening up its capital account and moving in the direction of a flexible exchange rate.
Introduction
Inflation is a situation wherein there are continuous increases in the price level of goods and services in an economy over a period of time. In a lay man language inflation, could be defined as too much of money charged for few goods or products. When generally the price rises, unit of currency buys fewer goods and inflation also reflects on reduction in purchasing power of per unit of money. Inflation is usually calculated by annualised percentage change in a general price index (normally the consumer price index) over time. Apart from this there are other widely used price indices for calculating inflation like Producer price indices (wholesale prices), Commodity price indices, and Core price indices.
India is considered to be the large market that doesn’t have a monetary policy framework. This is one of the main reasons why India mostly faces rise in inflation after the financial crisis. Common factors for inflation are GDP deflator, regional inflation, historical inflation, asset price inflation.
Effects of Inflation:
Inflation affects both the economy of a country and its social conditions, as well as the political and moral lives of its inhabitants. However, the economic effects of Inflation are stated and described below:
- Price inflation has immense effect on the Time Value of Money (TVM). This acts as a principal component of the rates of interest, which forms the basis of all TVM calculations. The real or estimated changes occurring in the rates of inflation lead to changes in the rates of interest as well.
- Inflation exerts impact on the treasury of a nation as well. In United States of America, Treasury Inflation-protected Securities (TIPS) ensures safety to the American government, assuring the public that they will get back their money. However, the rates of interest charged by TIPS are less compared to the standard Treasury notes.
- The most immediate effect of inflation is the decrease in the purchasing power of dollar and its depreciation. Inflation influences the investments of a country. The Inflation-protected Securities (IPSs) may act as a guard against the loss in the purchasing power of the fixed-income investments (like fixed allowances and bonds), which may occur during inflation.
- Inflation changes the allocation of income. This exerts maximum effect on the lenders than the borrowers at the time of persisting inflation, because the loans sanctioned previously are paid back later in the form of inflated dollars.
- Inflation leads to a handful of the consumers in making extensive speculation, to derive advantage of the high price levels. Since some of the purchases are high-risk investments, they result in diversion of the expenditures from regular channels, giving birth to a few structural unemployments.
Conclusion
Most of the economists today have a low or a steady rate of inflation. Low or negative rate in inflation reduces the hardness of recession by allowing the market to adjust more quickly in a down turn and reduces the trap which prevents from monetary policy from stabilizing. Generally these policies are the authorities for central banks which have monetary control through interest rates, open markets operations, and reserve requirements. Issues which lead to inflation are: optimal inflation rate, money supply and inflation, global trade. Other than this there are several other factors which determine impact of inflation in India they are: demand factors, supply factors, domestic factors, external factors, etc.Inflation is basically targeting the general frame work which is the new way in opening up its capital account and moving in the direction of a flexible exchange rate.
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