Essays

A sustained rise in the prices of commodities that leads to a fall in the purchasing power of a nation is called inflation. Although inflation is part of the normal economic phenomena of any country, any increase in inflation above a predetermined level is a cause of concern.

India's inflation rate remains far higher than in many other big emerging economies. In June 2011, inflation accelerated to 9.44 percent, as compared to around 5 per cent during 2003-08. The worry is that the inflation is expected to remain high in the coming months, till December-end 2011. Sadly, inflation in India is much higher than other emerging markets, such as China, Korea and Indonesia, where inflation is close to 3-5 per cent.

The causes of inflation are many. While it is often cited that a drop in India's agricultural output lead to the decline in supply, figures tell a different story. India's food production crossed 235 million tonnes during 2010-11 as per the latest estimates and this is the highest since Independence. The previous highest production, at nearly 233 million tonnes, was achieved in 2008-09. In 2010-11, the country produced 30.2 million tonnes of oilseeds, and 17.2 million tonnes of pulses, apart from 94.5 million tonnes of rice and 84 million tonnes of wheat. Maize production was 30 million tonnes, sugarcane 340 million tonnes and cotton 39 million bales. Agriculture recorded a 5.4 per cent growth compared to the four per cent growth achieved all these years, according to S. Ayyappan, Director-General of the Indian Council of Agricultural Research.

However, inflation reflects overheating: the supply capacity of the economy is simply unable to match the demands on that capacity. Moreover, purchasing power of consumers is increasing and hence demand is accelerating. Minimum support prices (MSP) for agriculture have also been increasing. The MSP for various varieties of paddy during the year 2009-10 was between $950-980 per quintal, and during 2010-11 it increased to $1000 to 1030 per quintal. Moreover, for pulses such as Arhar and Moong the MSP in 2009-10 was ? 2300 and 2760 respectively, while in 2010-11 it increased to $3000 and 3170 respectively.

Another major cause of inflation is the increase in the prices of fuel internationally, which is contributing to the overall price inflation. There has been a steady increase in the international prices, with the Indian crude basket priced at $113.09 per barrel, as on May 2011. Resultantly, the year witnessed continuous rise in the price of petrol which has gone up to $68.3 in Mumbai, $63.4 in New Delhi and $71 in Bangalore. The government also hiked the price of diesel by  $3 per litre, kerosene by $2 a litre and cooking gas by a steep $50 a cylinder in June 2011. Any change in price of diesel immediately impacts price of food items, since most them are dependent on transport through several hundred kilometres.

Inflation, in short, is "too much money chasing too few goods". According to analysts, corruption, mafia operations, greed for money by politicians and industrialists, counterfeiting of currency notes, etc also contribute to corruption as they add to the availability of liquidity in different forms, which in turn adds to inflation.

High level of inflation distorts economic performance. Inflation has added pressure on the central bank to raise rates despite signs of slowing growth in the Indian economy. The Reserve Bank of India (RBI) has raised rates 10 times since March 2010 to control the supply of currency in the economy and curb inflation. High inflation is pushing up the cost of credit for firms as well as escalating their input costs by inflating their spending on raw materials and wages. Thus, high inflation and rising interest rates are crimping domestic demand and slowing down the economy.

Inflation also affects investment as higher long-term inflation adversely affects growth and investment. Growth in private investment slumped to 0.4 percent in the quarter ending March 2011 from 7.8 percent in the previous quarter. High inflation is pushing up the cost of credit for firms as well as escalating their input costs by inflating their spending on raw materials and wages. Analysts estimate that Indian companies will have to pay 13 percent more to employees in 2011. Corporate investment is affected by cost escalation of inputs, and inflation is waning the confidence in the economic growth.