Posted by: Gomzy | May 24, 2008

Inflation in India – Analyzing Its Causes

Inflation is all over the news, touching 8.1%, highest in 45 months. Let me analyze the reasons, in layman’s terms. I would say that inflation is high because either the demand is exceeding the supply or supply is less than demand or both.

First let’s think about the demand side. To reason the causes first let us see what happened in the last one year. 2007-08 the GDP growth rate was at 9%, which is revised from provisional number of 8.7%. Not going into details we may conclude that we as a country prospered quite well. If I say we as a country prospered, I would say people had more money to spend.

Various central government plans like the national minimum wages guarantee program and other constructive work in the rural India has also meant money in the hands of the poor. I am not saying it is bad or they should not have done that but, yes it causes inflation.

Now let us remember what happened in the Budget 2008. Our Finance Minister did a poll gimmick and waived loans up to Rs. 60K crore. To think of the after effects, the farmers who would have saved money to pay back the loans are free to use the money as they wish. Where would that money go oh! Finance Minister? It is used up to buy things. Demand increases.

To look at the supply side, we sure did not have very good monsoons in last few years. Further more and more farmers are cultivating cash crops to make money (and if that goes naught they kill themselves). This means we have less food to eat isn’t it?

Crude is on a mountain climbing expedition and petroleum products prices are at all time highs all most every day. Though the government is cushioning the domestic prices the world market prices are not controlled. This results in higher transportation cost at the least and the imports become expensive.

On the topic of petroleum prices, we all know that government is giving huge subsidies on the petroleum products. How does that help any one? At the end of the day some one has to pay for the subsidy; and to think of it who else but the “Aam Admi”. Government will some way or other will have to raise the money and probably will impose new taxes direct and indirect. So the discount I now get on the petrol and cooking gas, I will pay back as taxes. What actually causes discomfort is the fact that later when they will impose taxes, it affects the poor by increasing the prices of the manufactured goods.

I would have rather like to see the money given as subsidies on petroleum products invested in infrastructure and making the public transport more useable by public. Further the subsidies are working towards subsidizing pollution.

Congress Government came to power by singing the “Aam Admi” slogan. It has been doing vote bank politics all the time, rather than steering the nation on a constructive path. If there are things which are not in ones control one should let it happen rather than causing more problems trying to control them.

Disclaimer: I did not do well in Economics Papers in my graduation may be because of my skewed understanding of the subject ;).

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Responses

  1. Ya, u r right, inflation happens only like this in india

  2. I wonder how come you didn’t do well in Economics. You explained and linked stuff so well.


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