Reducing Inflation – In recent years, India has been struggling with a situation called inflation, which occurs when the prices of goods and services rise, causing a decline in people’s purchasing power. This can have negative effects on the country’s economic growth and development.
To address this problem, the Indian government has implemented several measures to curb inflation. In this article, we will explore the actions that the Indian government is taking to combat inflation and the impact it has on the economy.
Exploring the Various Causes of Inflation
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Impact of Expanding Money Supply on Economic Development
When the amount of money circulating in the economy increases, it leads to higher liquidity, which means people have more money to spend on essential as well as luxury items. This results in increased demand for goods and services, which, in turn, allows suppliers to increase their prices.
While an increase in the money supply may seem like a positive development, it can also have negative consequences. For instance, it can lead to the devaluation of the domestic currency and contribute to inflation, which reduces people’s purchasing power in the long run.
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Disruption in the Supply
Natural disasters, geopolitical tensions, and other factors that disrupt the supply of goods and services can also contribute to inflation. When the supply of a particular commodity decreases, the price of that commodity increases, causing a ripple effect across the economy.
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Poor Government Policies
The government’s fiscal and monetary policies can have a significant impact on inflation. If the government engages in deficit spending or expands the money supply too rapidly, it can lead to inflation. Additionally, policies that discourage investment and economic growth can exacerbate inflation.
Factors that Influence Inflation
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Rising Oil Prices
The rise and fall of oil prices have a significant impact on inflation in oil-importing countries like India. The recent years have seen considerable volatility in oil prices, leading to market instability. The rising cost of crude petroleum, natural gas, mineral oils, and critical metals drove the April 2022 inflation rate.
In particular, the retail prices of fuel and light increased by 10.80% in April, compared to 7.52% in March. Brent crude, a key global benchmark, experienced substantial fluctuations during March-June, with prices rising to a high of $139 per barrel from $120, the highest level since June 2008. However, with the decline in demand for crude and the emergence of recession fears, prices eventually fell to $99.9 per barrel, illustrating the potential impact of external factors on inflation.
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The War Between Russia and Ukraine
The recent rise in retail inflation in India has been largely attributed to increasing prices of food and other essential items. The country is heavily dependent on imports of sunflower oil from Ukraine, which is a major global exporter of this commodity. In addition, Ukraine is also a significant supplier of fertilizers to India.
However, due to the ongoing geopolitical tensions and trade disruptions, there has been a shortage in the supply of these commodities, despite a consistent rise in demand. This supply-demand mismatch has further fueled the inflation of essential items, putting additional pressure on the economy and consumers alike.
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Rupee Depreciation
The Indian rupee has been consistently losing value against the US dollar for more than a decade. In the past year alone, the rupee has depreciated by over 7% against the dollar. The decreasing value of the rupee can also be a major factor causing inflation.
How is the Indian Government Controlling Inflation?
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Monetary Policies
Controlling the money supply is a significant monetary tool to manage inflation in an economy. Reducing the money supply can decrease the demand for goods, which can lead to a decline in prices. One effective method to reduce the money supply is to withdraw certain paper notes or coins from circulation.
Additionally, lowering the lending rates for commercial banks can help regulate the money supply. The Central Bank can also control the money supply by issuing government securities, which can act as a way to block the flow of money through commercial banks. These measures can help maintain stable inflation levels in the economy.
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Repo Rate
The repo rate is the interest rate at which commercial banks borrow money from India’s central bank – the Reserve Bank of India (RBI). When the repo rate increases, it becomes more expensive for banks to borrow money, so they tend to pass on this higher cost to consumers in terms of higher interest rates on loans. The idea behind raising the repo rate is to discourage people from taking out loans and thereby reduce credit availability in the economy which can help reduce demand-pull inflation.
On the other hand, when RBI decreases the repo rate it makes it cheaper for banks to borrow money from RBI, thus encouraging lending activity and increasing liquidity in the market.
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Fiscal Policies
Fiscal policy involves managing the government’s revenue and expenditure. When the demand exceeds supply, it creates an inflationary gap. To address this, the government can take two approaches. First, it can reduce overall government expenditure and transfer payments.
Second, the government can increase tax rates, which can lead to a decrease in individual demand and a decline in the economy’s money supply. By adjusting its revenue and expenditure, the government can regulate the demand and supply of goods and services in the economy, thereby controlling inflation.
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Wage Control
In India, the government uses a number of strategies to control inflation. One of these strategies is wage control. Wage control is the practice of controlling or limiting wages in order to manage inflation. This policy is used to reduce costs and make sure that prices don’t increase too quickly. It can also be used as a form of income inequality reduction since it helps ensure that workers have access to good wages even during periods of high inflation.
The Indian government has implemented various forms of wage control over the years, such as capping annual salary increases and mandating minimum wages for certain sectors. These policies have been designed primarily to keep labor costs down and make sure that prices remain affordable while not leaving workers without income security during inflationary times. The aim is also to reduce unemployment and improve economic growth by keeping businesses competitive in terms of cost structures and pricing advantages over their competitors.
5. Cost Push Inflation
Increases in the cost of products and services (such as the price of oil) may cause inflation and stall development. Regulating without impeding economic development would be difficult in this case due to the worst of all worlds.
Author Bio: Tanvi Kaushik specializes in Content Marketing and works with the Digital Team at KreditBee – India’s fastest personal loan platform where self-employed and salaried professionals can easily avail of personal loans in just a few minutes when in need of quick funds. Tanvi writes to-the-point articles on personal finance and budgeting which are truly appreciated by her readers. She is committed to making money matters easy to understand even for the layman. Her commitment to her work doesn’t stop her from pursuing her hobbies of hiking, trekking and going on adventurous trips.