Causes and Effects of Inflation in India

Causes and Effects of lump in IndiaIntroductionInflation is defined as the constant near in the scathe of a particular beloveds and ser misdeeds over a period of time. When the level of prices increases, sepa yardly unit of silver tail assembly purchase slighter goods and services qualification the buy baron bequeath go eat up. in that respect are two types of fanfare in this world including the dogmatic fanfare and negative pretension. A negative rising prices get out increase the chances of investors to hold their bills as the coming(prenominal) is still in uncertainty. They do not want to take risks of their m angiotensin-converting enzymey to invest in uncertainty and hence testament lead to extravagance of goods in mart. A positive pretension get out help the argot to ad just their real interest rate in a on the spur of the moment run and encourage investment in the non-monetary capital project.SummaryIn recent stratums, high fare fanfare in In dia is one of the factors which impart to non- feed pomposity and aggregate inflation. There are 4 factors that affect nutrient inflation occur, which are worldwide prices and trade insurance, rising beseech fork over mismatch, stagnant productivity and minimum support prices. During 2008 and 2010, international economist forecasted that trust be inflation on that social class caused that the international price of good increase. It affects the live of input which import from foreign solid ground has been increase as well. Besides, rising per capita income and diversification of diet in India causes that the demand of high-value product exchangeable eggs, meat fruits and early(a) rise while the response of supply of these products is macrocosm weak. To overcome the problem of stagnant productivity, Mahatma Gandhi National Rural Employment countenance Act (MNREGA) is promoted and it affect that the rural locks in India rise. Under this program, the indexation of wage rate to Consumer Price Index has been pushed up the minimum wage. (Sonna, October 2014)Food inflation result cause that wage rate increase because labor bottom of the inning request for a higher wage since food is constitute as an important good in their consumption basket. Increase of wage bequeath increase the approach of production and make the prices of non-food increase as well. On the same time, the real income of producer in food sector is increase during the rise in food price. It cause that the demand of non-food items go away rise ascribable to the increases of food prices which relative to aggregate price through re-sentencing effects and through income effect of the food producer. (Sonna, October 2014)When the price of food inflates, it give pay off the fluctuation in bills which has created a huge tinge on all the sectors. For instance, the internal rock stark naked oil price is linked with the international oil price. This lead to the oil price has a d irect family family with the Indian currency as US sawbuck which has already start one of the acceptable global currencies in the international market. However, the furbish up brought by the increase in oil price is not heavy and will cause a big preventive to the market because this increase in price will go through the otherwise sectors in the market. This contributes to office the burden of the increase in oil price among the other sectors. This causes inflation of other goods to spend due to the chain reaction happen when the prices of the domestic oil increase. (Dr.A.Hidhaya Mahammad Rafee.B, 2014)As the oil price and inflation build a cause and effect relationship, the fluctuations of oil prices have material impact on the inflation. The impacts of oil prices fluctuations are different in oil merchandiseinging and in oil importation countries. For the oil exporting countries, the increment of oil prices constituted good news while the increment of oil prices cons tituted problematic news for oil importing countries. For instance, China and India were known as the near consumption on the oil among the oil importing countries in the world. Anshul Sharma say that inflation will move in the same direction with the achievement of oil prices. The inflation rate increases as the crude oil increases and vice versa. Since the early of the 21st century, the prices of oil has rising heavily. This contributed to the higher inflation as the cost of production increased. The increment of cost of production led to the increment of fuel costs and then caused the lower of supply. Jose De Gregorio et al. stated that the fluctuation of oil prices had adverse impact on the economy. (M. Anandan, S. Ramaswamy and S. Sridhar, 2013)Besides, wear and tear in the currency will subsequently lead to the people to buy lesser goods with the same summate of money they hold. This case can be defines as a decrease in the purchasing power of currency. This journal has mentioned that India is considered as one of the largest market in the world that does not have whatever monetary indemnity framework to help to control the market. This is why the India always faces inflation later a financial crisis. There is no initiative taken by India to handle the inflation brought by the financial crisis which will lower down the currency of the expanse. People will now start to demand hardly a(prenominal) rupees and consider investing in other countrys currency. (Zainab Mulla, 2014)There is a strong pressure on the rupee currency which is caused by the strong demand of US dollar. This will lead to a study impact of inflation. The rupee depreciation will make India to produce militant goods in global market which will bring benefit for Indias exports. The exporters gain advantages as the abroad exported goods return more Rupees which are translated from dollar to Rupees. As a result, on that point is a relationship surrounded by Rupees depreciation and the inflation. (Deepa Divakaran.N and Dr.G.S.Gireeshkumar, 2014)According to Kamiar Mohaddes Mehdi Raissi (2014), the inflation could lower the growth by reducing the productivity and investment. Barro stated that there is a strong evidence for the negative impact of inflation on growth. Besides, the journal stated the inflation-growth relationship is highly non-linear. Besides, khan and Senhadji stated that the inflation rate above the threshold is negative and contractificant on growth whereas the inflation rate below the threshold is positive and insignificant.Gillman and Kejak stated that the inflation and growth has surveyed by various models and resulting in generating a negative relationship between inflation and growth. De Gregorio and Gomme proved that the relationship between inflation and growth is non-linear which means the growth rate will be lower as the inflation rate increases. Based on AK and AH models, inflation play a role as tax on any physical capital or human capital. This will lead to the decrement of the growth rate. Akerlof et al. besides stated the low inflation rate whitethorn have a positive relationship with output growth. This is because of low inflation causes the increment of productivity and resulting in higher growth. (Kamiar Mohaddes Mehdi Raissi, 2014)DiscussionCrude oil is an input in the value added chain of most agricultural products such as machinery fuel, transport and fertilizers. The rising of crude oil price causes that the cost of production rises and the price of final product increase as well. Moreover, now food products are common used in producing of biofuel energy ground on environmental preoccupation. Therefore, the substitution of crude oil by food product to produce fossil fuel causes that the food product demand increases in the market. As a prove, we found the data from US heftiness Information Administration and FAO which shows that the price of oil and food is positive relationship at year 2000 to 2010.When food inflation occurs, the wage rate will increases due to the productivity need to increase but supply of labor is limited in the market. By this, not only wage of campaign will increase, but the income of producer in food sector overly increase because of the windfall profits will energize higher than cost of production. It means that the citizen become richer and their demand of goods and services will increase as well through income effect. The increase of demand causes that it excess than supply in the market and then causes inflation occur. In couch to prove that food inflation will affect nonfood inflation and aggregate inflation, there was a Forecast Error Variance Decomposition (FEVD) analysis is done and shows that chromosomal mutation of food inflation contributes 54% of discrepancy of nonfood inflation and 46% variation in aggregate inflation after 1 month of the shock. after(prenominal) 10 month, the variation of nonfood inflation decreases to 46% while the variation of aggregate inflation increases to 72%. (Sonna, October 2014)Over the years, the currency rate of Rupee to US dollar mark is increasing each year. In year 2000, 1 USD can exchange for 45 Rs. However, in year 2013, the exchange rate has increased that 1 USD can exchange for 58.53 Rs. This causes the Rupee to depreciate its value due to the strong demand of US Dollar by the citizens. In order to prove the argument of Deepa Divakaran N and Dr G.S.Gireeshkumar, the major impact of inflation in India is caused by the peer pressure faced by Rupee currency as there are many people who demands US Dollar sort of than holding Rupee.When the currency is facing depreciation, people will move to hold others countries currency as Rupee has no more holding value. The demand for Rupee will drop and therefrom drives up the inflation. Cost-push inflation will occur when people now belief reluctant to spend their Rupee on normal goods and causes supply to be surplus and p ush the price to increase. Therefore, a drop in the currency of Rupee will affect inflation to happen.Throughout the research, we have count on out that the purchasing power for India is increasing linearly year by year since from year 1999 until now. Starting from year 1999, the GDP (Purchasing Power Parity) is 1,805 cardinal Dollar and for year 2014, it has increase to 7,277.3 Billion Dollar. This means that the purchasing power for India is getting bigger and bigger every year. As GDP grows, there will be more transaction happen insouciant and this will lead to an increase in the demand of Rupee. Thus, it will help to raise the exchange rate of Rupee to other countrys currencies. This will result in the increase of purchasing power of Indians. When the nations GDP (Purchasing Power Parity) increases, the exchange rate of Rupee to other countrys currency will decrease and this caused the import fee to decrease as well. This causes more and more transaction will occur because th e export fee is lower compared to the older time and this can help to drive up the countrys GDP.In order to prove the statement of Zainab Mulla, when the GDP (Purchasing Power Parity) in year 1999 is still at a lower stage, the citizens can barely afford to buy breads with 60Rs. However for year 2014, the GDP (Purchasing Power Parity) increase drastically, making the purchasing power of Rupee to increase. As a result, now they can afford to buy few types of bread with 60Rs. This shows that Rupee in year 2014 has more value than year 1999 because we can buy more stuff with 60Rs over 15 years. When the purchasing power of citizens increases, they will tend to spend more money rather than keeping it because they can get more goods with the current value. This action overly can help to increase the countrys GDP.On the other hand, the decrease in the price of the crude oil also becomes one of the catalysts in the economic growth in India. Crude oil as the largest internationally traded items will have an abrupt changes in economic if there are any changes in the price for the oil exporting and importing countries. This can be seen when the economic growth of India had shown a decrease sign from year 2010 to year 2013, which is decrease from 10.3% to 5.0%. This is because of the recent crude oil price has increased from 3,463Rs in year 2010 to 6,415Rs in year 2013. The increment in the price of crude oil will affect inflation to happen if the government chooses to absorb the burden by increasing the price of other petroleum products.In order to prove the statement of Gillman and Kejak, when the price of crude oil increase, the growth of the country will decrease as the petroleum-based products will have them increase in the price which causes the consumers will try to consumer less of these products. When these products have a low demand, the supply will be overladen and then leading to the output production level of the factory drop. Hence, the hearty economic gr owth will be stalled.ConclusionIn the nutshell, there are many causes and effect that are brought by inflation. It is undeniable that inflation is not favor in the country as it brings a hooking of negative effect and will drag the growth of country. However, we could not ward off inflation from happening in a country. What we can do is just try to minimize the impact bring by the inflation.One of the solutions to curbing the inflation problem is by selling bonds to the non-residential investors of the country. As we know that the leanness of Indians is very serious, the residents have less money to afford the bond interchange by the government. Hence, the government should make the bond available to the investors from other country which can afford it so that there is more money inflow to the country so that the government has more money to circulate the daily money flow of money.Other than that, the government should implement some policy that makes them to be less dependent to the import industry. They should encourage more export activities because they can earn more money when the exchange rate of Rupee drops. Incentives should be given in order to encourage this action.In humanitarian to the above, the government can also control the price of oil and give subsidies for the crude oil. By controlling the price of oil, all the petroleum-based products will also have their price controlled because they do not have to share the burden of increased price of oil. This will subsequently keep the inflation rate to remain under the threshold and will not cause any major problem to the economic growth of India.Last but not least, if the entire precaution steps have been taken to handle inflation problem, we can surely minimize the impact that bring by inflation.