CAPF-AC (Assistant Commandant) Exam Study Material :
Indian Economy - Inflation
Inflation refers to a situation of increase in the general
price level over a period of time. It is a part of business cycles. Every
country experiences it during the process of its growth and development.
Inflation has struck the Indian economy several times since independence. It is
a serious hurdle in the process of growth, as it cause a rise in the prices of
inputs. It also causes a rise in the rate of interest. Implying a rise in the
cost of investment. Further, it cause a fall in real income of the people.
Implying that the people are able to buy less goods and services with the same
money income. The present chapter discuss some of the basic issues relating to
inflation in India. It discusses indicators, trends, causes and effects of
inflation. It also discussed the remedial measures to control inflation.
In a broad sense, inflation is that state in which the prices of goods and
services rise on the one hand and value of money falls on the other. When money
circulation exceeds the production of goods and services, the state of inflation
takes place in the economy. Inflation is of two types:
Demand Pull Inflation
Cost Push Inflation
Demand pull inflation is that inflation when prices rise due
to higher demand for goods and services over the available supply. In other
words, demand pull inflation takes place when increase in production lags behind
the increase in money supply.
Cost push inflation is another type of inflation in which
prices rise due to increased input costs. On the other hand, deflation is that
state in which the prices of goods and services fall and the value of money
rises. In other words, deflation takes place when increase in money circulation
lags behind the increase in production.
Though both the phases of trade cycle are harmful to the
economy but a low rate of inflation is an inducing tonic to the developing
economy. Slow rise in prices is supposed to induce the producers to increase the
production which in turn ensures more and more employment opportunities in the
country. But uncontrolled and ever-rising inflation rate disturbs the economy.
Hence, it is required for the developing economies to keep a strict control on
inflation rate in the economy.
On the other hand, deflation is inexpedient for the economy
because it restrains production and employ ment generation. If the prices start
declining in the economy, producers curtail their productive activities which
generates unemployment and low demand. This continuous process leads to the
state of depression in the economy. The great depression of 1930’s is the best
example for this situation.
Causes of Inflation
Inflation is the consequence of a mismatch between demand and
supply in the economy. It occurs either when demand increases or when supply
decrease. In India, inflation is triggered by both demand and supply factors.
Following is a brief description of some important causes of inflation in India.