Reasons for Inflation in India – Demand Pull and Cost Push

Inflation means a sustained increase in the general price level. In the Indian set up it is causing reduction in the purchasing power and also threatening economic stability. In India both demand and supply factors have contributed to inflationary trends.

Inflation of the demand-pull or which occurs when the actual demand exceeds the potential supply. The main causes for the occurrence of demand-pull inflation in India are:

– Rise in Government Investment: Social welfare services, infrastructure, and subsidies increase government spending which boosts the aggregate demand. An example of this is the 7th Pay Commission which enhanced disposable income and hence consumer spending.

– Income/Expenditure Attaining an Increasing Muscular Power: Increased disposable incomes opening up greater opportunities for expenditure. For most of these people, especially the urban middle class majority, this translates to increased expenditure.

– Tastes and Preferences of the Consumers-Spending Habits Changed: The change in tastes and preferences of the consumers, for instance, the escalated consumption of protein-rich foods also tends to support inflationary conditions.

– Increase in Birth Rate: When the population increases very fast, the demand for food, housing, and other basic goods goes up, which causes inflationary pressures.

– Unaccounted Money (Black Money) in the System – The existence of black money in the economy forces people to have certain goods, especially in markets such as that for real estate, and this in turn leads to a general rise in prices.

Cost push inflation, as the name suggests is the inflation due to increase in the cost of production which subsequently reduces the aggregate supply. Among the key determinants of cost push inflation experienced in India are the following:

– Equilibrium between Demand and Supply Unable to be Reached: Due to some factors like the ongoing Russia – Ukraine conflict, the global supply chains are affected and hence due to the scarcity of certain goods the prices for example that of petroleum products goes up.

-Infrastructural Bottlenecks: In this case, transportation and logistics are not enough infrastructural as to help in reducing the costs of production especially in an inflation prone scenario of the market economy.

-Seasonality: Adverse weather conditions in the drought or flooding impacts the agricultural practices iring their production and causes an increased demand and prices of certain commodities mainly food. -Escalating Taxes on the Goods and —

-Services: An increase in the taxes of goods and services leads to a rise in the cost of production which is included in the prices for the customers.

-Administered Prices: For instance, a government sanctioned price for agriculture produce, referred to as the Minimum Support Price is expected to influence the general price levels.

There is need for the policy makers to know the elements of demand-pull inflation and cost-push factors to be able to implement the right policies in fighting inflation. The Reserve Bank of India has monetary policy instruments which include inflation management through interest rate adjustment and open market operations.