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Inflation in India ; Explained in detail

 Inflation in India ; Explained in detail


  • Apart from uncertainties in production, inflation causes certain serious imbalances in the economy. Price relationships are badly distorted and production pattern goes out of line with demand.
  • As a result, there is misallocation of resources. Capital resources available in the country get diverted from long-term to short-term uses and production shifts from essential to non-essential goods.
  • For example, if prices of non-essential goods are rising and those of essential goods are not, it will be more profitable to invest resources for the production of non-essential goods.
  • Inflation leads to recession in many sectors of the economy. For example, as a result of inflation, prices of certain articles of consumption in India have increased to very high levels forcing demand for such goods to decline.                      CONSEQUENCES OF INFLATION
  • Similarly, inflation brings about a squeeze in purchasing power so that people incur increasing expenditure on essential goods, while expenditure on the other goods declines and causes recession in industries producing these goods.
  • Rise in price level has eroded the volume of investment in real terms in India on many occasions and has led to distortions in cost calculations.                     Inflation in India ; Explained in detail
  • Inflation also leads to rise in interest rates as interest rates move in tandem to keep abreast of inflation to put a curb on rise in demand for loans from banks.
  • The most serious effect of inflation is on distribution of incomes which makes rich better off and poor worse off.
  • Profit earners gain because of inflation while people with fixed incomes tend to lose. Inflation has thus brought about shifts in the distribution of income in favour of the rich and perpetuated inequalities.
  • Inflation also breeds corruption, black-marketing and speculation and is responsible for generation of black money.
  • Inflation mars incentive for hard work because common man cannot meet his ends with limited income.
  • Inflation also makes exports costlier and to that extent may impact balance of payments and exchange rate.
  • Rise in interest rates due to inflation can also make borrowing by the government costly and thereby raise fiscal deficit.                             Inflation in India ; Explained in detail


Indian Economy

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