BPSC UPSC MAINS HOT TOPIC 25 Indian Inflation issues, causes and control

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The ‘ghost’ of inflation that has constantly haunted the Indian economic development has once again taken shape. This is mainly due to the lack of empirical models to help management agencies to solve the problem at its roots.

India‘s high food inflation is mainly due to supply-side constraints, and the central bank has been taking steps to control a buildup in inflationary expectations, its governor said Saturday.

“Monetary policy becomes the first line of defense, so if inflation persists for a long time, people think inflation is going to be high, and that becomes a self-fulfilling prophecy,” D. Subbarao said few days ago at a conference in Bhubaneswar.

Causes of Inflation

First, the costs of inputs such as wage increases, electricity, water, coals, steel have risen.

 Second, there is imported inflation. This is shown very clearly in the Indian mentality of preferring imported goods. The excess of imports over exports over many years has accumulated a relatively high imported inflation.Even though the relevant data are not available to carry out an economic regression analysis, one can still visualize the fixed relationship between the trade deficit and inflation. In the years when the trade gap is large, it is usually accompanied by the high inflation rate.

The third factor is the exchange rate policy. The devaluation of local currency on the one hand has forced an increase in import goods pricing. This should lift the competitiveness of domestic goods but instead they had sought to expand their profit margin. On the other hand, the increase in exchange rate has caused an increase in the costs of raw material inputs, there by exerting pressure on selling prices.

Fourth, the inflation in Indian relies heavily upon people’s mentality. Expectations of high inflation also lead to a tendency to increase prices of goods, especially during the holidays and New Year periods. Generally, when prices are increased to a new level, particularly in services and consumer goods, it is difficult to readjust the prices downward again.

In addition, the problems of credit growth, increase in the amount of money in circulation, and the dollarization of the economy are also factors in the inflation boost. Some studies have suggested that credit growth and inflation in Indian have the latency between 6 to 8 months. However, this conclusion is only based upon statistics illustrated by graphs and is not yet proven by any quantitative models.

How to control inflation:

Article attached can be a good source on this topic:

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