INFLATION: CAUSES, IMPACT, MEASURES BY THE RBI (QUESTION ANSWER FORMAT) by VVR IAS

[IMS Delhi]

INFLATION: CAUSES, IMPACT, MEASURES BY THE RBI
(QUESTION ANSWER FORMAT)

Q) RBI had earlier said that for 24 odd months we've had a sustained increase in inflation, and inflation in layman's term is when too much money chases too few goods then you have what we call as the inflation. But there are times when people say that it's good for the economy because companies borrow a lot of money for expansion, people visit super markets, college kids have extra pocket money to spend. So, there is what they call the good inflation and bad inflation. Where are we right now in India? Is it good or is it bad? Is it good inflation or is it bad inflation?

A). To begin with, inflation can be either demand led or it can cost push led and in our particular case, it's a combination of the two. Cost push when we say, we have the import inflation through oil. We have seen large inflation rise because of the oil. We have a scenario where by 60% of the price paid for petrol or diesel essentially is tax – that is one. Two, we are facing high inflation on account of food articles and that inflation is happening because of low productivity, we don't have sufficient cold storage units. For Example, whatever efficiency that we have seen in our services industry – IT in particular – if that is on a scale of 100 and it is at 100, our efficiency for food articles will not be even 30 or 40 and that's the gap which has to be breached and which is what is hurting the common man. Certainly it’s a matter of concern because it’s not driving investments. When there is a large inflation scaling at you it does impact the investment climate typically when you have high inflation you have high interest rate also which impacts the entire economy, cost of doing business goes up and it has a negativity associated to it .

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By : VVR IAS

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