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What are the major factors in India’s inflation problem?

What are the major factors in India’s inflation problem?


1 Answer

The major factors in India’s inflation problem are:

Increase in Nominal Money Supply: Without corresponding increase in output, increases in the aggregate demand. The higher the money supply the higher will be the inflation.

Increase in Disposable Income: When the disposable income of the people increases, their demand for goods and services also increases.

Expansion of Credit: When there’s expansion in credit beyond the safe limits, it creates increase in money supply which causes the increased demand for goods and services in the economy. This phenomenon is also known as credit-influenced inflation.

Deficit Financing Policy: Deficit financing raises aggregate demand in relation to the aggregate supply. This phenomenon is also known as deficit-financing induced inflation.
Black Money Spending: People having black money spend money lavishly, which increases the demand unnecessarily, while supply remains unchanged and prices go up.
Repayment of Public Debts: When government repays the internal debts it increases the money supply which aggregate the demand.

Expansion of Private Sector: Private sector comes with huge capitals and creates employment opportunities resulting in increased income which further increased in the demand for goods and services.

Increasing Public Expenditure: Non-development expenditures of government lead to raise aggregate demand which results as increased demand for factors of production and then increased prices.

Shortage of Factors of Production or Inputs: Shortage of factors of production i.e. raw material, labor, capital etc. causes the reduced production which causes the increase in prices.

Industrial Disputes: When industrial disputes come to happen i.e. trade unions resort strikes or employees decide lockouts etc. the industrial production reduces and as a short supply of goods in the market the price go up.
Natural Calamities: Natural disasters, invasions, diseases etc. effect the agricultural production and shortage of supply which furthers the rise in prices.

Artificial Scarcities: Hoarders, black marketers and speculators etc. create artificial shortage to earn more profits by keeping the prices high.

Increase in Exports: When the country has tends to earn maximum foreign exchange and exports more and more without considering the domestic use of the commodities, it creates a shortage of commodities at home which increases the prices.

Global Factors: This factor includes the changing global environment. Most common is the rise in oil prices. This factor of inflation may vary in nature i.e. it can be political, strategic, economic or logistic in nature.

Neglecting the Production of Consumer Goods: When the production of consumer goods is neglected with reference to the increased production of luxuries it also creates inflation.

Application of Law of Diminishing Returns: This law applies when the industries use old machines and methods and which increase in cost by increasing the scale of production. This furthers the increase in prices and hence inflation bursts out.

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February 12, 2019