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INTRODUCTION Inflation is defined as a general rise in prices of all commodities. It is not the rise in the price of my favorite commodity, but the overall rise in the prices of all the goods and services manufactured and consumed within the territory of a nation. When we say that the monthly rate of Inflation is 12%, what it means is that on an average, the prices of all goods and services have increased by 12% in the period of last one month. The balance of payments crisis, resulting from the underlying imbalances in the form of high inflation, high fiscal and current account deficits during the 1980s marks the beginning of this phase in 1991. The nature of the crisis was so grave that it warranted immediate correction of the situation. A series of reforms, in the name of Macroeconomic Stabilization Programme and Structural Adjustment Programme, covering the industrial, financial, fiscal and external sectors were introduced. The first half of the 1990s witnessed a resurgence of inflationary tendencies with the inflation rate averaging just above 10% during 1991-92 to 1995-96. The economic survey58 (1991-92), in this respect, stated that the buildup of inflationary pressure is mainly attributable to excess demand arising from the large and persistent fiscal deficits over the years, resulting in excessive growth in money supply and a liquidity overhang. There have also been supply and demand imbalances in sensitive commodities like pulses, edible oils, etc. due to shortfalls in domestic production and constraints in importing desired quantities due to the severe foreign exchange crunch.
points out that there is a long-term trade-off between output and inflation. He adds on that shortterm trade-off happens to only introduce uncertainty about the price level in future. There is an agreement that the central banks have aimed to introduce the target of price stability while an argument supports it for what that means in practice.
1. The Optimal Inflation Rate
It arises as the basis theme in deciding an adequate monetary policy. There are two debatable proportions for an effective inflation, whether it should be in the range of 1-3 per-cent as the inflation rate that persists in the industrialized economy or should it be in the range of 6-7 percents. While deciding on the elaborate inflation rate certain problems occur regarding its measurement. The measurement bias has often calculated an inflation rate that is comparatively more than in nature. Secondly, there often arises a problem when the quality improvements in the product are in need to be captured out, hence it affects the price index. The consumer preference for cheaper goods affects the consumption basket at costs, for the increased expenditure on the cheaper goods takes time for the increased weight and measuring inflation.
2. Money Supply and Inflation
The Quantitative Easing by the central banks with the effect of an increased money supply in an economy often helps to increase or moderate inflationary targets. There is a puzzle formation between low-rate of inflation and a high growth of money supply. When the current rate of inflation is low, a high worth of money supply warrants the tightening of liquidity and an increased interest rate for a moderate aggregate demand and the avoidance of any potential problems. Further, in case of a low output a tightened monetary policy would affect the production in a much more severe manner. The supply shocks have known to play a dominant role in the regard of monetary policy. The bumper harvest in 1998-99 with a buffer yield in wheat, sugarcane, and pulses had led to an early supply condition further driving their prices from what were they in the last year. The increased import competition since 1991 with the trade liberalization in place have widely contributed to the reduced manufacturing competition with a cheaper agricultural raw materials and the fabric industry. These cost-saving driven technologies have often helped to drive a low-inflation rate. The normal growth cycles accompanied with the international price pressures has several times being characterized by domestic uncertainties.
3. Global Trade
Inflation in India generally occurs as a consequence of global traded commodities and the several efforts made by The Reserve Bank of India to weaken rupee against dollar. This was done after the Pokhran Blasts in 1998. This has been regarded as the root cause of inflation crisis rather than the domestic inflation. According to some experts the policy of RBI to absorb all dollars coming into the Indian Economy contributes to the appreciation of the rupee. When the US dollar has shrieked by a margin of 30%, RBI had made a massive injection of dollar in the economy make it highly liquid and this further triggered off inflation in non-traded goods. The RBI picture clearly portrays for subsidizing exports with a weak dollar-exchange rate. All these account for a dangerous inflationary policies being followed by the central bank of the country. Further, on account of cheap products being imported in the country which are made on a high technological
and capital intensive techniques happen to either increase the price of domestic raw materials in the global market or they are forced to sell at a cheaper price, hence fetching heavy losses.
imported at a higher price impacting the price rise. Hence, the nominal exchange rate and the import inflation are a measures that depict the competitiveness and challenges for the economy.
REFERENCE
Book Reddy, Y.V. (1999): Inflation in India: Status and Issues in Y.V. Reddy (2000): Monetary and Financial Sector Reforms in India. Distributors Ltd., New Delhi, p. 46-47. Website
http://en.wikipedia.org/wiki/infalation in india