INFLATION

INFLATION

                               INFLATION

 

Inflation has a tremendous impact on the general population. Though the organised class of employees both in the public and private sectors get some amount of periodical reliefs there is a vast section of the population who have no such benefit. Further there is also large number of retired persons who do not have any pensionary or other retirement benefits. The impact of inflationary pressures is very severe and crushing in the case of such persons.

 

TABLE 

Consumer price index for industrial workers

 Base 2001 = 100

 Year       Index            % Change over      Rate of inflation                  Food

            Average     base yr        prev yr                 (point to point)      inflation

                                                                                (highest)              (highest)

 2006        123         23%

2007        131         31%           6.5%      2007  Aug   133     7.26%

2008        141         41%          7.64%     2008  Oct    148    10.45%

2009        157         57%        11.35%     2009  Dec   169    14.97%

2010        176          76%       12.10%     2010  Jan     172    16.22%     Feb 27   17.87%

2011       192          92%         9.30%      2011 Nov   199    10.06%      Feb3      17.05%

2012       209         109%        8.85%      2012  Dec   219

                                                                2013 Aug   237

    (Source labourbureau.nic.in/indnum.htm)

 

Most of the Economists and the authorities highlight and discuss only the changes in inflation rates. The cumulative effects of the inflationary conditions are seldom highlighted. The inflation rates only give the percentage increase of the prices over a previous price level which was prevailing a month ago or a year ago. This does not portray a true picture of the price changes. However if we look into the actual Price Index Numbers than we can clearly understand the impact of the price increases over a period of time as shown in the above Table.

 

The rate of inflation has been continuously on the rise for the past 13 years. The average Index of Consumer prices has shot from the Base of 100 in the year 2001 to 209 in 2012. If simply put this means that if person spent Rs.100 for his living in the year 2001 he would be required to spend Rs.209 in the year 2012, an increase of 109% in 11 years. It can also be seen that the rate of inflation for food products is much higher.

  

Reasons for Inflationary Conditions

 There are several reasons for inflationary conditions in an economy.

Price of any article (unless it is regulated by the government) is basically influenced by the demand and supply of the commodity. If there is more demand than the supply the price of that article will tend to rise. The price will also rise if the cost of manufacture or production increases. The prices can increase even if there is hoarding or monopolistic trade practices which tend to create artificial scarcity conditions.

Inflationary tendencies raise its head due to fiscal conditions prevailing in the economy. When the government spends much more than the revenues it gets from taxes and other incomes it is called as Deficit Financing. To bridge this gap between revenues and expenses Governments resort to Borrowings by issuing various instruments like Treasury Notes, Bonds, loans, etc. Such borrowings tend to increase the Interest rates prevailing in the economy. Hence a huge Budgetary Deficit also leads to inflationary conditions.

 

    MEASURES TAKEN FOR CONTAINING INFLATION

 

To contain Inflation basically two types of measures are taken. One is the Fiscal Measures to be taken by the Government and the other is the Monetary Measures to be taken by the Reserve Bank of India.

 

The Fiscal Measures to be taken by the government would include the following:

Reducing the Budgetary deficit by increasing the revenues and reducing the expenses.

Ensuring the availability of essential commodities by properly utilising the reserve stocks available with the Government and distributing them through dedicated retail outlets at reasonable rates

Take strong measures to prevent hoarding of commodities

Controlling the prices of essential commodities

Importing of articles which are in short supply due to shortfall in local production

 

The Monetary Measures taken by the Reserve Bank of India would include:

Changes in the Deposit and Lending Rates of interest of the Banks

Steps to prevent loans being given by the Banks to hoarderers and black marketers

Ensuring availability of loans for productive purposes

Steps to reduce the Money supply in the Economy

 

 

Tag; To understand the full impact of inflation read the detailed article "Bank Depositors - a Discriminated Class" appearing in www.kaushikvichar.com

Author

Kaushik Vichar

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