Causes and Remedies for Inflation

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Causes and Remedies for Inflation

By | June 2012
Page 1 of 8
Causes and Remedies of Inflation in India

Inflation by definition involves rise in prices of goods and services. Inflation is usually caused by demand outstripping supply of goods and services. It can also be caused by suppliers/traders of certain goods and services (or speculators in goods) hiking their prices in order to effectively increase their profits/incomes. Such attempts to increase their incomes/profits may also be, in many cases, through hoarding or speculation or restrictive practices or through concerted action, formal or informal, of Syndicates/Guilds/.Unions/Associations/ groups of traders/industries. Demand exceeds supply in respect of certain goods and services where a shortfall in supply or an in increase in demand occurs. The shortfall in supply may be due to crop failure or problems in production/transportation/distribution/import of the goods. In the case of services supply shortfalls may arise due to such factors as withdrawal of services on account of action of unions or due to shift of personnel with the requisite knowledge and skills to some other line of activity. Inflation also results from money incomes and spending going up without commensurate increase in supply of the goods and services that are demanded from out of the increased incomes. (This is usually referred to as demand-pull inflation.) Such increase in money incomes may result inter alia from the following: (a) increased expenditure on projects with long-gestation period; (b) new releases in cash of subsidy, pensions, salaries/wages under schemes like National Rural Employment Guarantee Scheme or implementation of Pay Commission’s recommendation or Agreements with Unions for rise in salaries/wages;

(c) funds received from abroad against services from our country received abroad (e.g., against export of software) (d) funds received from abroad under schemes like Marshall plan...