Causes and Remedies for Inflation

Topics: Inflation, Money supply, Money Pages: 8 (2773 words) Published: June 28, 2012
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

Speculators and hoarders succeed in raising their prices more particularly where they have a monopolistic or oligopolistic hold over the market. Usually hoarders and speculators become more active when a shortage in supply emerges because of some calamity such as a war, drought, cyclone or other failure or a supply breakdown (as stated above) or when there has been a steep upsurge in demand which cannot be met soon enough by increase in supply.

Usually it is the self-employed people who might (as a mater of common understanding and covertly or overtly cooperative or concerted action in concert with others in the same line profession/activity to the extent possible) be amongst the foremost to raise the prices of their services whereas salaried employees secure increases in their salaries with considerable time-lag and only upon demand, often with threats of strike. In a market economy increase in demand induces manufacturers/producers/suppliers/traders to try to increase their supplies. Such increase in supply may be by increase in production or import from other regions/States or even other countries. If such increases in supplies can be arranged quickly there may be no rise in the general level of prices. But suppliers may not be able to ensure commensurate rise in supplies soon enough for a variety of reasons including the following and inflation is unavoidable until supplies are raised:

(a) The capacity to produce/manufacture may be limited and it may take considerable time to increase the capacity
(b) The inputs required including raw materials, labour with the necessary competence, utilities like water, electricity etc. may be limited and securing necessary supply of the same may take considerable time © The licenses, permits, approvals, sanctions required from the Regulators, higher authorities, Government, Banks etc. for raising the production, import etc. may take time to materialize.

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