Upto 60% Off on UPSC Online Courses

Avail Now
Home  »   UPSC Blogs  »   Understanding Inflation in Ind...

Understanding Inflation in India: Causes, Impact, and Solutions

PWOnlyIAS October 16, 2023 07:30 2125 0

Blogs UPSC Blogs

Understanding Inflation in India: Causes, Impact, and Solutions

Context:

  • Consumer Price Index (CPI) Inflation in India dropped to 5.02% in September from a high of 7.79% in April 2022 and is now within RBI’s Inflation tolerance limit of 4 ±2%.

  • Definition: Inflation is the rate of change in the general price level of commodities.
  • Measurement:  It is measured using  indices measuring the change in prices of a predetermined set of items. 
  • Prominent Indices used: Inflation in India is officially measured through the Consumer Price Index (CPI) and Wholesale Price Index (WPI).  At present, based on the recommendation of the Urjit Patel Committee, CPI is used by RBI for inflation targeting. 

Managing Monetary Policy in India: Regulating Inflation In India 

  • Objective: It aims to tighten or relax monetary policy based on divergence of inflation forecasts determined  from inflation target fixed.
  • Reason for adoption: Urjit Patel Committee had recommended inflation targeting to be the “predominant objective of monetary policy in its policy statement.”
  • Target: Central bank is mandated by the government to  maintain inflation in India at 4 ±2%

Difference between CPI and WPI: Two component to measure inflation in India

Parameters CPI WPI
Base Year
  • 2012 (From January, 2015)
  • 2011-12
Scope
  • Includes Goods and Services
  • Includes only Goods
Released by
  • National Statistical Office (NSO), Ministry of Statistics and Programme Implementation (MoSPI)
  • Office of Economic Adviser, Ministry of Commerce and Industry
Major components
  • Food and Beverages (45.86%) >Housing(10.07%)> Transport and communication (8.59%)>Fuel and Light 6.84%
  • Manufactured goods (64.23%) > Primary article(22.62%)> Fuel and Power (13.15%)
Purpose
  • It captures movement in prices of goods and services that households acquire for the purpose of consumption.
  • WPI captures the average movement of wholesale prices of goods.
Uses
  • RBI’s Inflation targeting, Measuring DA for employees
  • GDP Deflator
Relevance
  • They better encapsulate the demand side pressures in the economy.
  • Monetary policy cannot control food or fuel inflation in India.

 

Core Inflation in India

  • Definition: Core inflation is the persistent component of inflation in India.
  • Purpose: It attempts to remove the volatile, transitory movements from the CPI. 
  • Measurement: In India it is measured by removing Food and Fuel categories from CPI.

Analysing Recent Factors Contributing to High Inflation in India: A Multifaceted Perspective

  • High Food Inflation in India: Deficit monsoon along with erratic weather patterns– unseasonal rain and flooding in certain regions has caused a spike in wheat, tomato, edible oils, and egg prices.
  • Volatile Fuel prices: A $10 increase in crude oil price increases inflation in India by 40-60 bps as India is dependent on imports for 80% of its fuel demand.
  • COVID-induced lockdowns: It caused supply chain disruptions across the world pushing up prices.
  • Post-Covid rebound: It led to a drastic increase in demand for goods causing demand pull inflation in India.
  • Russia-Ukraine Crisis: It caused not only an increase in crude oil prices but also soaring food (wheat and sunflower) and commodity prices.

Impact of Persistent High Inflation: Unpacking Economic Consequences and Social Implications

A moderate amount of inflation in India  is generally considered to be a sign of a healthy economy because as the economy grows, demand for stuff increases. However persistent high inflation can have many negative consequences like the following:

  1. ‘Inflation tax’: Inflation in India erodes the purchasing power of money, which means people can buy less with the same amount of money.
  2. Exacerbates inequality: It disproportionately impacts the poor, unemployed, people with fixed incomes and retired workers.
  3. Reduces economic activity: Inflation increases the cost of borrowing for businesses and also makes them less competitive against international peers.
  4. Currency depreciation: Inflation in India leads to depreciation of currency which can impact economic stability.
  5. “Spillover Effect”: Sustained inflation in india  in some categories of goods eventually leads to inflation in other categories and if not contained may become structural.

Combating Inflation in India: Analysing Strategic Monetary, Fiscal, and Trade Measures

  • Monetary Policy: RBI has been continuously increasing the repo rate under the Liquidity Adjustment Facility (LAF) to decrease the money supply. It went from 4% in April 2022 to 6.50% in February 2023. It also introduced the Incremental Cash Reserve Ratio (ICRR).
  • Fiscal Measures: The Central Government has undertaken fiscal measures like reduction in excise duty on petrol and diesel, and rationalisation of import duties on raw materials used in the manufactured products.
  • Trade Measure: Prohibition of the export of wheat products, imposition of export duty on rice, reduction in import duties and cess on pulses, rationalisation of tariffs and imposition of stock limits on edible oils and oil seeds, maintenance of buffer stock for onion and pulses.

Way Forward: Enhancing Economic Resilience

  • Monetary Transmission: Make it more efficient so that RBI can manage inflation more effectively.
  • Improve Data Collection: Update CPI basket including changing relevant weightage to reflect contemporary consumer demands.
  • Aatmanirbhar Bharat: Reduce dependence on imported fuel and other essential commodities.
  • Farm Reforms: Introduce Farm reforms and improve farm logistics for stable output and prices.

Conclusion 

  • Managing inflation in India requires a comprehensive approach encompassing strategic monetary policies, fiscal measures, and trade interventions. Upholding the recommendations of the Urjit Patel Committee for inflation targeting, enhancing economic resilience through efficient monetary transmission and improved data collection, reducing dependency on imports, and implementing farm reforms are crucial for maintaining a stable and robust economic environment.
Must Read
NCERT Notes For UPSC UPSC Daily Current Affairs
UPSC Blogs UPSC Daily Editorials
Daily Current Affairs Quiz Daily Main Answer Writing
UPSC Mains Previous Year Papers UPSC Test Series 2024

 

Print Friendly, PDF & Email

Inflation in India FAQs

Urijit Panel Committee

Consumer Price Index

It attempts to remove the volatile, transitory movements from the CPI

They better encapsulate the demand side pressures in the economy; monetary policy cannot control food or fuel inflation in India.

Recommended For You

July 25, 2024
UPSC EPFO Interview 2024 Date, Marks, & Result
July 25, 2024
UPSC EPFO Eligibility Criteria 2025, Qualification, & A...
July 25, 2024
APJ Abdul Kalam Death Anniversary: Missile Man of India
July 25, 2024
Kargil Vijay Diwas 2024, History and Importance of Vijay Diw...
July 25, 2024
World Hepatitis Day 2024: History, Theme, Government Initiat...
July 25, 2024
International Tiger Day 2024, Theme of World Tiger Day, 29th...

Latest Comments

Live Blog

Recent posts

July 25, 2024
UPSC EPFO Interview 2024 Date, Marks, & ...
July 25, 2024
UPSC EPFO Eligibility Criteria 2025, Qualific...
July 25, 2024
APJ Abdul Kalam Death Anniversary: Missile Ma...
July 25, 2024
Kargil Vijay Diwas 2024, History and Importan...
July 25, 2024
World Hepatitis Day 2024: History, Theme, Gov...

Archive Calendar

Mon Tue Wed Thu Fri Sat Sun
 1
2345678
9101112131415
16171819202122
23242526272829
30  

by month

Need help preparing for UPSC or State PSCs?

Connect with our experts to get free counselling & start preparing

THE MOST
LEARNING PLATFORM

Learn From India's Best Faculty

# #
      
Subscribe our Newsletter
Sign up now for our exclusive newsletter and be the first to know about our latest Initiatives, Quality Content, and much more.
*Promise! We won't spam you.
Yes! I want to Subscribe.

Contact Details

G-Floor,4-B Pusha Road, New Delhi, 110060

Download Our App

# #

 Final Result – CIVIL SERVICES EXAMINATION, 2023.   Udaan-Prelims Wallah ( Static ) booklets 2024 released both in english and hindi : Download from Here!     Download UPSC Mains 2023 Question Papers PDF  Free Initiative links -1) Download Prahaar 3.0 for Mains Current Affairs PDF both in English and Hindi 2) Daily Main Answer Writing  , 3) Daily Current Affairs , Editorial Analysis and quiz ,  4) PDF Downloads  UPSC Prelims 2023 Trend Analysis cut-off and answer key

THE MOST
LEARNING PLATFORM

Learn From India's Best Faculty

# #
      
Follow Us:
Subscribe our Newsletter
Sign up now for our exclusive newsletter and be the first to know about our latest Initiatives, Quality Content, and much more.
*Promise! We won't spam you.
Yes! I want to Subscribe.

Contact Details

Download Our App

# #

 Final Result – CIVIL SERVICES EXAMINATION, 2023.   Udaan-Prelims Wallah ( Static ) booklets 2024 released both in english and hindi : Download from Here!     Download UPSC Mains 2023 Question Papers PDF  Free Initiative links -1) Download Prahaar 3.0 for Mains Current Affairs PDF both in English and Hindi 2) Daily Main Answer Writing  , 3) Daily Current Affairs , Editorial Analysis and quiz ,  4) PDF Downloads  UPSC Prelims 2023 Trend Analysis cut-off and answer key
Quick Revise Now !
AVAILABLE FOR DOWNLOAD SOON
UDAAN PRELIMS WALLAH
Comprehensive coverage with a concise format
Integration of PYQ within the booklet
Designed as per recent trends of Prelims questions
हिंदी में भी उपलब्ध
Quick Revise Now !
UDAAN PRELIMS WALLAH
Comprehensive coverage with a concise format
Integration of PYQ within the booklet
Designed as per recent trends of Prelims questions
हिंदी में भी उपलब्ध

<div class="new-fform">







    </div>

    Subscribe our Newsletter
    Sign up now for our exclusive newsletter and be the first to know about our latest Initiatives, Quality Content, and much more.
    *Promise! We won't spam you.
    Yes! I want to Subscribe.