INFLATION: A Hurdle in Economic Growth
By Ajay Tyagi
Overview:
One of the biggest issues in front of the Indian economy is the rising inflation. The rising Inflation came in the midst of the celebrations of the economic growth, which reduced the charm of growth. This article talks about the impact of Inflation on growth rate, the measures taken by the government to curb Inflation and its impact on the economy and the best-suited method that could be implemented keeping in mind the long-term solutions.
Introduction:
Inflation is usually a cause of uncertainty in the economy. Low inflation causes uncertainty among the producers and high inflation eventually leads to uncertainty among the consumers. It has been rightly said that for a developing country like India, some inflation acts as the motivator for the producers to perform better, but at the same time acts as the repellent for the customers. Hence for the substantial economic growth it becomes mandatory to maintain the stable inflation rate, which ranges from 3.5-4.5%. It was only during the period of economic crisis in India that India faced the problem of very high inflation.
In the recent times one could witness the highs in the inflation rate. It is being experienced when we are targeting the economic growth in the double digits. The high inflation rate has no doubt reduced the speed of economic growth.
Inflation and Economic growth:
Inflation is nothing but the rise in the prices. It happens as a result of disequilibrium in the demand and supply. The supply of money is relatively more, thus demand for goods increases to a greater extend. But the problem arises when the supply of goods is unable to match the rise in the demand for the goods. At this moment Inflation acts as a trap... it is expected that due to the inflation, the investment plan will be postponed and ultimately it is the production that would suffer. There is negative correlation between inflation and economic growth. Inflation not only reduces the level of business investment, but also the efficiency with which productive factors are put to use.
There are several factors affecting the GDP, though there should be efficient and effective factors to reflect a robust and sustainable growth rate. The economy no doubt is flourishing, but the rising trend in inflation and apprehensions relating to its control have reduced the pace of the economic growth.
The graph showing the inflation and GDP trend over the past few years reflects that although the adverse influence of inflation on growth looks small, but this is clear that the long-term effects on standards of living are substantial.
Measures:
In the recent past, central government with RBI, is taking certain steps to curb inflation, such as: raising rate of interest, increasing CRR etc... but neither proved effective. They had their own repercussions....
Raising rate of interest: The day RBI decided to hike interest rates...the reaction could be seen on the sensex. It was in April 2007, that reaction of the rise in interest rates was seen on the Sensitive index, posting its biggest drop in ten months, closed deep in red with a 4.7 per cent intra day loss.
Increasing CRR: On March 30, 2007, RBI announced the monetary measures to control inflation. The step taken by them was to increase the CRR by 100 basis points. As a result of the above increase in the CRR, an amount of Rs.15, 500 crores of resources of banks would be absorbed. This would make it difficult for the banks to lend money. Ultimately the investments in several projects would also be adversely affected.
It has been rightly stated by RBI governor that interest rates or CRR if increased further, will not be beneficial for the developing economy. It was observed that whichever way they moved, the final result will come in the form of the trade-off between inflation and growth.
Opinion:
It is desired to understand the root cause of inflation. After analyzing various situations, I won't be wrong in saying that it is unsystematic economic growth has lead to inflation. This is because the economic growth has lead to the rise in the levels of investment, production, and employment and ultimately there was rise in the level of income. The purchasing power of the customers has increased to the greater extent. They have money in their hands to demand what they desire, but the market is not yet ready to supply them enough. This difference in the demand for and supply of goods has caused inflation. Therefore, as one can foresee, the suitable measure to control inflation gradually would be to increase the supply of goods, so as to match the demand of the consumers and gradually increase the value of money.
But the past trend shows that with the time the inflation has kept on increasing at the cost of the decline in the growth rate. At this point of time the government and the regulatory bodies should understand that the situation is of NOW OR NEVER. It is desirable on their end to take firm steps instead of following the technique of trial and error. Or else the day is not far, when the dream to see India Shinning will be shattered.
To conclude it can be said, "The efforts to keep inflation under control will sooner or later pay off in terms of better long-run performance and higher per capita income."
By Ajay Tyagi
Overview:
One of the biggest issues in front of the Indian economy is the rising inflation. The rising Inflation came in the midst of the celebrations of the economic growth, which reduced the charm of growth. This article talks about the impact of Inflation on growth rate, the measures taken by the government to curb Inflation and its impact on the economy and the best-suited method that could be implemented keeping in mind the long-term solutions.
Introduction:
Inflation is usually a cause of uncertainty in the economy. Low inflation causes uncertainty among the producers and high inflation eventually leads to uncertainty among the consumers. It has been rightly said that for a developing country like India, some inflation acts as the motivator for the producers to perform better, but at the same time acts as the repellent for the customers. Hence for the substantial economic growth it becomes mandatory to maintain the stable inflation rate, which ranges from 3.5-4.5%. It was only during the period of economic crisis in India that India faced the problem of very high inflation.
In the recent times one could witness the highs in the inflation rate. It is being experienced when we are targeting the economic growth in the double digits. The high inflation rate has no doubt reduced the speed of economic growth.
Inflation and Economic growth:
Inflation is nothing but the rise in the prices. It happens as a result of disequilibrium in the demand and supply. The supply of money is relatively more, thus demand for goods increases to a greater extend. But the problem arises when the supply of goods is unable to match the rise in the demand for the goods. At this moment Inflation acts as a trap... it is expected that due to the inflation, the investment plan will be postponed and ultimately it is the production that would suffer. There is negative correlation between inflation and economic growth. Inflation not only reduces the level of business investment, but also the efficiency with which productive factors are put to use.
There are several factors affecting the GDP, though there should be efficient and effective factors to reflect a robust and sustainable growth rate. The economy no doubt is flourishing, but the rising trend in inflation and apprehensions relating to its control have reduced the pace of the economic growth.
The graph showing the inflation and GDP trend over the past few years reflects that although the adverse influence of inflation on growth looks small, but this is clear that the long-term effects on standards of living are substantial.
Measures:
In the recent past, central government with RBI, is taking certain steps to curb inflation, such as: raising rate of interest, increasing CRR etc... but neither proved effective. They had their own repercussions....
Raising rate of interest: The day RBI decided to hike interest rates...the reaction could be seen on the sensex. It was in April 2007, that reaction of the rise in interest rates was seen on the Sensitive index, posting its biggest drop in ten months, closed deep in red with a 4.7 per cent intra day loss.
Increasing CRR: On March 30, 2007, RBI announced the monetary measures to control inflation. The step taken by them was to increase the CRR by 100 basis points. As a result of the above increase in the CRR, an amount of Rs.15, 500 crores of resources of banks would be absorbed. This would make it difficult for the banks to lend money. Ultimately the investments in several projects would also be adversely affected.
It has been rightly stated by RBI governor that interest rates or CRR if increased further, will not be beneficial for the developing economy. It was observed that whichever way they moved, the final result will come in the form of the trade-off between inflation and growth.
Opinion:
It is desired to understand the root cause of inflation. After analyzing various situations, I won't be wrong in saying that it is unsystematic economic growth has lead to inflation. This is because the economic growth has lead to the rise in the levels of investment, production, and employment and ultimately there was rise in the level of income. The purchasing power of the customers has increased to the greater extent. They have money in their hands to demand what they desire, but the market is not yet ready to supply them enough. This difference in the demand for and supply of goods has caused inflation. Therefore, as one can foresee, the suitable measure to control inflation gradually would be to increase the supply of goods, so as to match the demand of the consumers and gradually increase the value of money.
But the past trend shows that with the time the inflation has kept on increasing at the cost of the decline in the growth rate. At this point of time the government and the regulatory bodies should understand that the situation is of NOW OR NEVER. It is desirable on their end to take firm steps instead of following the technique of trial and error. Or else the day is not far, when the dream to see India Shinning will be shattered.
To conclude it can be said, "The efforts to keep inflation under control will sooner or later pay off in terms of better long-run performance and higher per capita income."
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