Inflation is referred to as a rise in the general level of prices or a sustained rise in the general level of price. In case, general price level rises, each unit of money buys fewer goods and services. Consequently, Inflation ...
Rising inflation can have both positive and negative effects on India's GDP. Here's a nuanced explanation: *Positive effects:* 1. Increased aggregate demand: Moderate inflation can stimulate consumption and investment, boosting aggregate demand. 2. Economic growth: Higher demand can lead to increaseRead more
Rising inflation can have both positive and negative effects on India’s GDP. Here’s a nuanced explanation:
*Positive effects:*
1. Increased aggregate demand: Moderate inflation can stimulate consumption and investment, boosting aggregate demand.
2. Economic growth: Higher demand can lead to increased production, employment, and economic growth.
3. Monetary policy: Inflation can prompt the central bank to maintain low interest rates, encouraging borrowing and investment.
4. Fiscal policy: Government spending and tax reforms can be tailored to mitigate inflation’s impact on vulnerable populations.
*Negative effects:*
1. Reduced purchasing power: High inflation erodes consumers’ purchasing power, potentially reducing demand.
2. Uncertainty: Volatile inflation can create uncertainty, deterring investment and consumption.
3. Inequality: Inflation disproportionately affects the poor and fixed-income households.
4. Currency depreciation: High inflation can lead to currency depreciation, making imports costlier.
*India-specific factors:*
1. Demand-driven growth: India’s consumption-driven economy benefits from moderate inflation.
2. Investment-led growth: Inflation can stimulate investment in infrastructure and industry.
3. Rural demand: Inflation can boost rural incomes and demand, supporting agricultural growth.
4. Government initiatives: Policies like Make in India, Digital India, and infrastructure development can mitigate inflation’s negative effects.
*Conditions for inflation to boost GDP:*
1. Moderate inflation (4-6%): Avoids stifling economic growth.
2. Supply-side measures: Improving productivity and efficiency can offset inflationary pressures.
3. Monetary policy management: Calibrated interest rate adjustments can balance growth and inflation.
4. Fiscal prudence: Targeted government spending and tax reforms can support growth.
*Data and projections:*
1. RBI’s inflation target: 4% (+/- 2%) CPI inflation.
2. India’s GDP growth projections: 7-8% (FY2024-25).
3. Inflation projections: 5-6% (FY2024-25).
See less
Rising inflation directly doesn't lead to increase in india's GDP, Rather it leads too increase in nominal GDP of the country which is calculated at current year prices of final goods and services, that neans inflation leads to increase in nominal GDP even if the productivity of the country is stagnRead more
Rising inflation directly doesn’t lead to increase in india’s GDP,
Rather it leads too increase in nominal GDP of the country which is calculated at current year prices of final goods and services, that neans inflation leads to increase in nominal GDP even if the productivity of the country is stagnent
Which makes Nominal GDP of a country as an illusionary indicator of growth in an economy while real indicator is increase in Real GDP which is calculated at base year prices (unaffected by inflation)
Infact sometimes Increase in Nominal GDP of a country results in negetive growth in following ways
1. Increase in cost of production
As a result of increase in general price levels producers would face increase in cost of production, This leads to lower profit margins which makes the producers difficult to survive
2 Lower consumer spending in long term
Rise in general price levels leads to decrease in purchasing power of consumer if income doesn’t increase proportionately, as a result consumer tends to reduce the consumption
3. Rise in interest rates
To curb the inflation RBI mmay increase the interest rates, so that it makes costly to consumer to borrow and it tends to lower the consumer spending
4. Economic unstability
Inflation leads to uncertainty in economy which makes it difficult to make decisions for consumers as well as producers which results in. Economic unstability
GOVERNMENT can take necessary steps to curb the inflation through fiscal policy so as to reduce uncertainty in market by
• Increasing taxes on income to reduce the purchasing power of consumers
• decresing govt spending or investments
• borrowing more from public to reduce the money supply in markets
Through monitery policy by
• increase in repo rates or reverse repo rates
• controlling open market operations
• increasing interest rates etc
See less