Inflation is the gravest economic concern which has gripped India into its jagged tentacles. Inflation can be defined as the rise in overall price level in the economy, i.e. rise in prices of all the goods and services. When prices rise, each rupee buys less goods and services than it had been before, consequently eroding the purchasing power of money. It is measured through inflation rate- the annualized percentage change in a general price index (Consumer Price Index and Wholesale Price Index) over time.


India has been plagued by the disease of inflation since the 1950s but it has started showing its prominently harmful symptoms and ill effects since 1991, post liberalization. Kick started by the fiscal crisis of 1991, marked by deficits in government finances and devaluation of the rupee, a whopping inflation of 13.66 per cent took its toll on the Indian economy. Though later controlled, average inflation rate has been stubborn at a 9.3 per cent per year till the end of the 19th century. Since last year’s global meltdown somewhat crippling the Indian economy, the inflation rate has been steadily rising to surpass the double digits. At present, it is around 11 per cent.

Causal Factors:

The puzzle haunting the Indian economists is simply this- Why is inflation rate in India so high as compared to the other emerging and overheating market economies, like China, Korea and Indonesia where inflation just touches a mere 3 per cent?

There are a couple of explanations for this-

Firstly, India has been very much underinvested as compared to China whose rate of investment for the year 2009 was 45 per cent as compared to India’s 37 per cent. This has been the key to China’s development, (currently fastest in the world) free from all scars of inflationary pressure.

India has always been subject to uncertainty of the monsoons, particularly last year, which led to a sharp fall in agricultural produce, declining supply and thus shooting up the prices. This is called the Supply shock factor or the cost push inflation.

Another reason, intuitively named as the Policy Shock is responsible for inflation. Hike in fuel prices, subject to the discretion of OPEC, increases the manufacturing cost of a number of industries, which in turn shoots up the prices of their respective commodities.

Apart from the above, there is another explanation, namely overheating: the supply capacity falls short of demand. Now, overheating in India is a serious cause of worry because it certainly implies that the economy’s current growth rate of 8.4 per cent surpasses its potential or trend growth rate. In this scenario, how can anyone in India dream of China-type-double-figure growth rates unless and until infrastructure development is given some serious thought?

Microeconomic distortions causing an increase in land prices accompanied by various macroeconomic factors such as surging capital inflows in the real estate and housing sector are very much responsible for the rising cost of production in the economy. Apart from agriculture and manufacturing, service sector which contributes the highest (54 per cent for 2009-2010) also bears dire consequences of galloping prices of land.

Excess of short-term borrowings and speculative activities are majorly responsible for a steady inflation in the Indian economy. Highly volatile, these short term borrowings lead to a vicious cycle of speculation, which ends up causing serious depression in the economy, sometimes insolvency.  Increase in speculative activities leads to a rise in domestic price, thus making the exports expensive. This ensues in the deficit in the balance of payments which forces the government to pump in money into the economy by printing currency notes. This, along with the adjustment of the BOP, plays havoc with the demand capacity of the economy. Since people own more money now, their demand for goods and services accelerates like anything and this further leads to a rise in prices.


The dire consequences of this phenomenon are levied upon the aam admi.  Of course somebody like you and me, or someone less well off than us cannot be considered as aam aadmi. Aam aadmi clan is that 70 per cent of the population of India who spend less than Rs 20 on themselves every day. Right from the rickshawallas in Delhi, to the daily wage earners in Bihar, these people struggle to make ends meet. Prices of food items like vegetables, fruits, pulses, oil, wheat, rice, etc, conveyance, education and healthcare have soared up to no extent, thus causing the cost of living to increase.

The RBI has been implementing the only monetary strategy it knows, increasing the interest rates to squeeze liquidity. According to the forecasts of the Bloomerag News survey, the RBI will increase both the repurchase and the reverse repurchase rates by a quarter points each. This has led to an upsurge in agitation among the opposition parties who are stubborn against any rise in interest rates.

However, the government needs be careful lest it ends up hampering the growth of the economy with such a tight credit policy. A balance needs to be maintained between the credit liberty for growth on one hand and tightening liquidity for tackling inflation on the other.

Wages, in the country are on a high rise these days. World leading mobile phone supplier Nokia Pvt Limited and IT companies such as Wipro and Infosys have taken a step ahead and raised the wages of their employees to retain them.

Future Predictions:

The RBI predicts that it will be able to pull down inflation rate up to 6 per cent by the end of this year.

If in future inflation is not curbed, it will not only deprive the aam admi of basic amenities but along with it, also deprive the Indian economy of its growth of all the sectors.

Nikita Dhingra

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