Now may be the best time to sing the folk song ‘Mehangai daiyin khaye jaat h’ (Inflation named witch is a killer) but sadly singing a song is a challenge because coronavirus has killed the mood. Prices of food products and petrol have skyrocketed. The common man like always is helpless. With no job, the future seems shrouded in clouds of uncertainty. The government is doing its bit by provisioning the poor through ration distribution. This however cannot suffice for the uncertainties that are waiting ahead. To understand what is happening in India currently, we have to know about the concept of inflation.
Inflation simply means a rise in the price of goods that we, the consumers, use daily. In India, the ministry of statistics and program implementation has the responsibility of measuring inflation. It can occur due to a variety of reasons like excess money circulating in the economy that reduces the purchasing power of the money, high demand and low supply or the supply-side constraints that cannot cater to the present level of demand. There are many types of inflations depending on the reason and the effect. The one that we experienced most recently is called stagflation. It is a condition with no economic growth, relatively high unemployment along with high inflation.
Inflation decreases the purchasing power of the currency. This translates to a higher cost of living further pulling down the economic growth of the country. Like everything else inflation also affects people differently. It is profitable for borrowers because they own an asset that was bought from the borrowed money. On the other hand, inflation is bad for those who kept cash or liquidity since the money that they own now has less value than before.
Interestingly, a little inflation is good for the economy because it improves expenditure. In simple words, a small amount of inflation will prevent people from saving money. Instead of increasing the bank balance, the focus will shift on investment and this will bring economic growth to the country.
We are living in unprecedented times. India’s story of inflation is the same as other economies. The pandemic has disrupted supply and demand. Many external factors have influenced the economy. Crude oil price, for example, is determined by complex metrics of international economics which include import and export of the commodity amongst other things. Despite bumper production in the primary sector or agricultural sector, there were logistical issues that ensued during the pandemic. Customers were risk-averse and tried to save money by cutting down the investment. The demand for goods became low. There were incentives by the government and the Reserve Bank of India, the central bank, to improve the demand. These included decreasing the repo rate to make interest rates more lucrative to the people. Till now nothing seems to work since inflationary pressures persist.
To keep a check over inflation, the government tried to set a target in the Fiscal Responsibility and Budget Management Act, 2003. Albeit, the experts suggest that right now inflation should not be a matter of concern for the government. The focus should be on public investment so that the economic engine that went cold can run again. This means that price might remain high for some time. The government will try to compensate for the inflationary pressure through schemes and subsidies to give to impetus demand and this is the only silver lining that we can rely on during these tumultuous times while waiting for normalcy to get restored.