Inflation in India

Topics: Inflation, Monetary policy, Money supply Pages: 25 (8307 words) Published: June 5, 2012

2nd M.COM
India is one of the trillion dollar economy in the world and known for its unique qualities which is turning itself into a hot destination for foreign investors and there are also certain problems which is retarding its economic growth as of today among many major economic problems INFLATION is also one and in past recent months it went to double digit also. In this report mainly the actual meaning of the inflation, major reasons for steep hike in the price level, effects of inflation, how it is retarding the growth of our nation and suitable suggestions have been made to curb the inflation. INTRODUCTION:

In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time. When the general price level rises, each unit of currency buys fewer goods and services. Consequently, inflation also reflects erosion in the purchasing power of money – a loss of real value in the internal medium of exchange and unit of account in the economy. DEFNITION OF INFLATION:

Different economists have defined the term ‘inflation’ in different ways. Basically inflation can be defined in two ways. Earlier writers based their definition on the well known Quantity theory of money and explained inflationary trends in prices in terms of an increase in the supply of money. Irving Fisher is of the view that the prices are affected much more by the supply of money than by supply of goods. The second approach of inflation has been put forward by economist like Wicksell, Bent Hansen and J.M. Keynes. According to this approach, “general price level is determined by the total demand for and total supply of the group of goods concerned, the prices of which determine the general price level”. And the inflation is defined as that situation in which the total demand for goods, indicated by the volume of money offered, is in excess of the supply of goods at prevailing prices. According to Chamber’s Twentieth Century dictionary inflation means a “disproportionate and as relatively sharp and sudden increase in the quality of money or credit or both, relative to goods available for purchase. Inflation always produces a rise in the price levels”. The Austrian School asserts that inflation is an increase in the money supply, rising prices are merely consequences and this semantic difference is important in defining inflation. Austrians stress that inflation affects prices in various degree, i.e. that prices rise more sharply in some sectors than in other sectors of the economy Crowther defines inflation as “a state in which the value of money is falling i.e. prices are rising”. In Pigou’s opinion inflation takes place “when money income is expanding relatively to the output of work done by the productive agents for which it is the payment” At another place pigou says that “inflation exists when money income is expanding more than in proportion to income earning activity”. Coullborn says it is a phenomenon where, “too much money chases too few goods”. All these definition show that the basic phenomenon is that of quantity of money in circulation exceeding the total amount of goods and services which leads to an extraordinary increase in prices. For example if you take a loan where the stated interest rate is 6% and the inflation rate is at 3%, the real interest rate that you are paying for the loan is 3%. It would also hold true that if you had a loan at a fixed interest rate of 6% and the inflation rate jumped to 20% you would have a real interest rate of -14%. So, inflation is a situation in which the general level of prices keeps on rising primarily due to stimulus that is continuously being administered by the ever-rising demand in face of inadequate physical supplies. Thus inflation refers to a persistent rise in the general level of prices much in excess of the supply of...
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