Inflation means when the normal price level in an economy rises continuously and the value of the currency decreases.
It is an economic concept based on the mathematical estimation that calculates the spread of money in the market and the increase or decrease in the prices of goods.
What Is Inflation?
For example: If the number of goods that came in one hundred rupees in the year 1990, if you have to spend two hundred rupees to buy the same number of goods it in 2000, then inflation will be 100 percent.
If the price in the economy rises for some time and then decreases and then increases again, we will not call it inflation.
In inflation, the normal price level should rise continuously. Inflation has a bad effect on people in a certain income group.
Because their income is fixed and their purchasing power decreases when prices rise thus inflation in a developing economy has a very severe effect.
This is probably the most popular of all economical terms. But defining it is a difficult task. Different scholars have given different definitions of this.
It is born when too much money is supplied for very few goods.
It is born even when the demand is more than the supply of goods or services.
Its thrive on supply deficiencies, obstruction, and structural imbalances.
In general, this would mean that it is an increase in the price level in a given period of time at a constant rate, which increases the possibility of growth in the future.
Inflation in India is measured by the Wholesale Price Index and the Consumer Price Index for Industrial Workers. We have defined below for both.
Causes Of Inflation
There may be several causes or reasons for inflation. They can be divided into two main parts:
Demand-Pull arises from an increase in the demand for goods services, while cost-push is obviously caused by price increases or decreases in the supply of goods services.
Increasing government expenditure: which has been increasing for the last several years.
Which brings more money into the hands of the general public, which increases their purchasing power.
This is mainly unplanned, which is unproductive in nature and only increases purchasing power and demand.
Deficit budgeting: and the increase in the money supply are offset by rising government expenditure from the Deficit Budget, and by printing new currencies that increase both inflation and supply.
Fluctuations in production-supply: Whenever there are excessive fluctuations in production or the profiteers accumulate the output received.
Wage increases over productivity increase the cost price, which in turn leads to an increase in price, as well as an increase in demand and purchasing capacity that increase under the former heading.
Indirect taxes also become factors for increasing the value of material by increasing the cost price.
A decrease or defect in infrastructure development leads to a cost price per unit that increases the normal price.
Read This:- History Of Banking In India
An increase in administered prices such as the minimum support price of food grains or the prices of petrol.
And other products that the government voluntarily determines as they form a major part of the budget of the common man.
Effects of inflation
This has the following effects on the economic sector of the country.
1. Impact On Investor
There are two types of investors. The first type of investors is those who invest in government securities.
Fixed income is derived from government securities and other investors are those who buy shares of joint capital companies.
Their income increases due to inflation. Inflation will benefit the first type of investor and loss to the second type.
2. Impact On A Fixed Income People
In the fixed income category, all those people whose income is fixed like laborers, teachers, bank employees, etc.
Read This:-What is national income?
Inflation increases the prices of goods and services, which has an impact on fixed income groups.
Thus the fixed income group incurs losses due to inflation.
3. Effect On Farmers
Inflation has a favorable impact on the farming class as the farming produces and the prices of production rise during inflation.
Thus, during inflation, the farming gets benefits.
4. Impact On The Debtor And Lender
It has an adverse effect on the lender and a favorable effect on the debtor.
Because when the lender lends his rupee to someone, the value of his rupee will decrease due to inflation.
Thus the lender deficit from inflation and the debtor get benefits.
5. Effect On Savings
This has an adverse effect on savings as expenditure on goods increases due to inflation. This will reduce the possibility of saving.
Second, inflation will reduce the value of money and people will not want to save.
6. Effect On Balance Of Payments
Prices of goods and services increase during times of inflation. Due to this, our exports will become expensive and imports will become cheaper.
The export will decrease and imports will increase due to which the balance of payments will become unfavorable.
7. Impact On Public Loans
This leads to an increase in public debt because when the price level rises, the government has to increase its expenditure on public schemes to meet this expenditure.
Hence public debt increases due to inflation.
8. Impact On Taxes
Public expenditure of the government increases greatly due to inflation.
The government impose new taxes to meet its expenditure and increases the old taxes.
Thus, due to inflation, the burden of taxes increases.
9. Moral Nature
Due to inflation, the business group is blinded by greed and uses hoarding, profiteering, and adulteration, etc. to sell products.
Read This:- 16 Mahajanapadas And Their Kings
Government employees indulge in corruption and moral values decline in individuals.
10. Effect On Producers
Due to inflation, the producer and the entrepreneurial class get a benefit.
Because the prices of the goods produced by the producers are increasing. Thus, entrepreneurs and producers benefit from inflation.
Measures To Control Inflation
The following measures can be adopted to control;
We can also control inflation by regularizing the supply of currency through monetary policy. The following monetary measures can be used to control.
1. Money Volume Control
It can be controlled by controlling the amount to be controlled by the central bank.
When the central bank imposes strict control over the amount of money, the amount of money will be controlled.
2. Credit Control
The central bank can control credit to overcome rising prices. The central bank can use both quantitative and qualitative measures to control credit.
Under these measures, the bank can increase the repo rate and reverse repo rate, increase the minimum cash fund, sell securities in the open market, rationing of credit and increase the marginal requirement.
If it is not possible to control inflation, then the government can also resort to demonetization.
Under the demonetization, the government replaces the old currency with a new currency. So that inflation can be brought under control.
In fiscal we can include the following measures:
1. Reduction In Public Expenditure
Increase in public expenditure increases people’s purchasing power.
An increase in purchasing power will increase demand and an increase in demand will increase the price level.
Thus by reducing public expenditure we can control inflation.
2. Increase In Public Debt
The rise in prices is due to the increase in demand which leads to an increase in public debt.
To reduce demand, the government can take loans from the private sector.
When the loan will be taken from the private sector, there will be a decrease in the expenditure of the private sector.
Thus, by increasing public expenditure, one can control inflation.
3. Increase In Taxes
Public expenditure increases due to inflation. To meet this expenditure.
The government imposes new taxes and increases the rates of old taxes.
An increase in the rates of taxes has the opposite effect on production.
4. Reduction In Deficit Financing
Deficit financing is adopted when the government’s income falls short of the expenditure.
Read This:- What Is Non Performing Asset (NPA)?
In deficit financing, the government releases new currency and increases the supply of currency in the economy.
Therefore, to control inflation, deficit financing has to be reduced.
In addition to monetary and fiscal measures to control inflation, there are some other measures.
1. Increased Production
It can also be controlled by increasing production because inflation arises when aggregate demand exceeds total supply.
Thus we can control inflation by increasing total supply or production.
2. By Encouraging Savings
You can control inflation by increasing savings. The government should run schemes that encourage savings.
When savings increase, personal expenses will decrease and demand will reduce by itself and the price level will come under control.
3. Price Control And Ration System
Ration system is an important system to control inflation. In the rationing system, the price level does not increase much and everybody gets the goods as per their requirement.