Root Causes of Inflation in India

Root Causes of Inflation in India

Tags:      Gig Economy     Economy     WTO     WTO Public Stockholding     MSP     Economic Growth     Masala Bond     Environmental Performance Index     Forecast of Economic Growth     Functions of the Finance Commission

At the macroeconomic level, inflation may be attributed to mismatches in collective demand and supply. Some of the major variables influencing inflation across the nation are discussed here.

1. Agricultural production variations - Agricultural growth is characterised by severe swings and is sensitive to natural occurrences. Such changes in foodgrain output in specific years were a key role in the growth of foodgrain prices in addition to general prices.

2. Essential commodity hoarding - There is also rising upward pressure on prices for agricultural products due to substantial hoarding by farmers, intermediaries, dealers, and black marketers, as well as farmers themselves.

3. Surge in oil prices and global commodity prices - The rise in crude oil prices produced inflationary pressures. Consistently elevated international crude petroleum cost, averaging roughly US $ 111 per barrel in 2011, as opposed to US $ 80 per barrel in 2010, have led to local inflation.

4. Regular upward adjustment of administered prices - Several administered prices, such as fuel, diesel, steel, cement, and coal, have been regularly revised higher. This resulted in cost-push inflation in the whole nation.

6. Government Agricultural Price Policy - In order to give incentives to farmers, the government has announced Price Support for a variety of agricultural goods. The Minimum Support Price (MSP) system also has a significant impact on prices. From 2000-01 to 2006-07, the baseline MSP rose gradually; but, in 2008-09, the MSP in practically every crop increased by 30 percent or more.

1. Agricultural production variations - Agricultural growth is characterised by severe swings and is sensitive to natural occurrences. Such changes in foodgrain output in specific years were a key role in the growth of foodgrain prices in addition to general prices.

7. Increase in government spending - Government spending in India has been constantly increasing. This has resulted in increased public demand for products and services, as well as a rise in prices.

8. Mounting Fiscal Deficit - A major source of inflation is rising fiscal deficit. The government's large fiscal deficits are financed through lending from the nation's banking system. This tends to expand the money supplies in the economy, hence increasing demand.

9. Unaccounted money - There is a considerable amount of undeclared money in the possession of those who evade taxes, developers, corrupt politicians, government employees, and others. A substantial portion of it is utilised to store various vital goods such as grains, lentils, sugar, edible oil, and so on. Consequently, black money does have a significant role in driving up prices.

10. Massive capital inflows - As the Indian economy becomes more integrated with the remainder of the globe, massive capital inflows have occurred. This has resulted in an increase in liquidity, with a subsequent influence on prices and demand levels throughout the economy in particular years after the change.

11. Consumers' consumption patterns - alter structurally as they get wealthier, according to Engel's Law, resulting to a rise in the intake of protein-rich commodities such as fish, meat, eggs, and millet. According to NSSO surveys, such a shift in consumption pattern in India has resulted in an increase in demand and prices for such commodities.

Therefore, price inflation in the country is both a structural and a monetary issue. In the medium to long term, monetary aggregates movements like as the supply of money and interest rates have affected aggregate demand and, as a result, alterations to the level of prices in the economy.