CAPF-AC (Assistant Commandant) Exam Study Material : Indian Economy - Inflation

CAPF-AC (Assistant Commandant) Exam Study Material : Indian Economy - Inflation

Indian Economy


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:

  1. Demand Pull Inflation

  2. 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.

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