Inflation Unplugged: The Indian Scenario

Inflation refers to a persistent rise in the prices of goods and services over a period of time in an economy. It occurs due to mismatch in the demand and supply of commodities. It directly impacts the consumers as the value of money decreases.Terms related with InflationDeflation: It refers to the persistent fall in the prices of goods and services over a period oftime.Disinflation: It refers to the decrease in the rate of inflation. When the prices of goods and services in an economy are rising hut with the less intensity than they earlier were, then it is the situation of disinflation.Reflation: It refers to the increase in the money supply after the deflationary phase, to bring the economy hack on track.Hyperinflation: It is the phase of rapid rise in the prices of goods and services in the economy. It leads to the rapid fall in value of money so much so that people start losing faith in the currency and government start to think to switchover to barter or other currency.Stagflation: It is a situation in which inflation co-exists with recession & unemployment. This may happen because beyond a point inflation starts affecting demand adversely, leading to fall in demand for certain products due to high prices. So that in those industries recession sets in. It could also happen due to rising input prices as a result of inflation. Thus affecting cost and leading to slowdown of production in these industries.Depression: When goes on unchecked and unaddressed for a very long period of time spreading over a period of 2-3 years, it signifies the onset of depression which is marked by a rapid fall in demand, price level, mass unemployment, collapse of business optimism and a consistent negative GDP rate of growth.Causes of Inflation: There are broadly two sets of factors which affect demand.* Demand pull factors.* Cost-push factors.Demand pull factors: These are the factors which are responsible for a rise in the demand for goods and services in general.In India the prominent demand pull factors are as follows:* Rise in the_population. India's population is around 130 cr and it is rising. Although our total fertility rate has gone down but still with the current increase, the demand for goods and services is bound to rise rapidly. If the supply does not increase proportionately then it will lead to increase in the prices.* Rising wages, income after salaries: Middle class in India is growing rapidly. We are also experiencing the push of urbanization. It leads to more money in the hands of consumer which in turn converts into demand in the market. Thereby leading to increase in the prices.* Rising forex reserves: India's foreign exchange reserve has come a long way since the crisis of 1991. Today we have a substantial amount of foreign currency to the tune of around $350 bn. High reserve leads to issuance of more domestic currency. This increased money supply creates demand in the market which in turn leads to high prices of goods and services demanded.* Rising government expenditure: The expenditure of Indian government is rising with every Five year plan. While, it is the rise in non-planned expenditure which impacts the prices of commodities more in the market. Non-planned expenditure leads to more money supply which again turn into demand.* Black money: People generate black money by corrupt practices and evading tax. It leads high spending which creates unnecessary demand in the market. With constant supply, this demand raises the prices of commodities.* Deficit financing: When the expenditure of the government is higher than its revenue which is made up by borrowing or minting new funds, it is referred to as deficit financing.Costpush factorsThese are the factors due to which there is a rise in the overall cost of production and/or shortfall in the supply.The prominent cost-pushfactors are asfollows:* Hoarding, Black-marketing, Speculation: In Indian markets, this is one of the main factors which causes rise in the prices. …