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 also degrading in the purchasing power of money which leads to affect negatively GDP. What are the different types of inflation?
RBI has to increase the rate of interest in order to stabilize prices because higher borrowing cost can obstruct business investments which might slow down GDP growth and other economic activity. Indian exports become less competitive which would lead to trade deficit further impacting GDP negatively. However, government steps taken to control Inflation such as Spending on subsidies, readjustment in taxation can also affects GDP. At what range, the rate of intrest affects the cost borrowing for business and their investments?
Sometimes, high inflation can lead to social unrest or political instability which were creating volatile economic environment resultant in disruption of GDP growth.
Firstly we understand how inflation measured. Inflation is measured by comparing the cost of things today with how much they cost a year ago. Rising inflation means pricing of the good and services are increasing continuously or fast change. So rising inflation can have both positive and negative impact on India’s GDP.
Positive impact depends on the economic environment, here is your answer:-
a) Rising wages: There is a tendency of producing an inflationary wage-price spiral. Employees call for increased salaries to cope with increased expenses, employers increase the prices of goods and services in order to recover increased expenses.
b) Impact on Markets: When inflation is high the stock price is thus low , while conversely the value of gold is high. lawsuit and resulted in higher interest rates.
c) Increased consumer spending: Inflation has dire consequences in that average prices of goods or service will go up. This can lead to consumer will spend more money in the present. Then more contribution to consumer spending has led to increased contribution to the GDP.
d) Increasing business investment: When prices are high there are big probabilities that many authorizations will employ more in production capabilities, hire more works. This will boost the economy.
e) Government revenue increases: When prices increase then the more revenue returns to government account through sales tax, Goods and services tax, tax deducted at source and other taxes. This revenue will in turn be used by government to construct more infrastructure in developing their project and social welfare.
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).