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  • Although Inflation and Growth Go Hand in Hand

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    A certain level of inflation is always considered healthy for GDP growth. But beyond a point if inflationary pressures are allowed to persist it may become counterproductive to our developing economy. Inflation impacts growth in two ways : 1) on demand side by making goods and services including inputs costlier. 2) When the monetary authority adjusts interest rates to check inflation. As the interest rates go up.cost of borrowing goes up thereby creating a large variety of consumption loads.

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    A certain level of inflation is always considered healthy for GDP growth. But beyond a point if inflationary pressures are allowed to persist it may become counterproductive to our developing economy. Inflation impacts growth in two ways : 1) on demand side by making goods and services including inputs costlier. 2) When the monetary authority adjusts interest rates to check inflation. As the interest rates go up.cost of borrowing goes up thereby creating a large variety of consumption loads.

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    33 views2 pages

    Although Inflation and Growth Go Hand in Hand

    Uploaded by

    alimk89
    A certain level of inflation is always considered healthy for GDP growth. But beyond a point if inflationary pressures are allowed to persist it may become counterproductive to our developing economy. Inflation impacts growth in two ways : 1) on demand side by making goods and services including inputs costlier. 2) When the monetary authority adjusts interest rates to check inflation. As the interest rates go up.cost of borrowing goes up thereby creating a large variety of consumption loads.

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    Although inflation and growth go hand in hand ,where a certain level of inflation is always considered healthy for GDP

    growth . Yet beyond a point if inflationary pressures are allowed to persist , it may become counterproductive to our developing economy. This is because a high rate inflation impacts growth in two ways :

    1) On demand side by making goods and services including inputs costlier ,thereby giving a setback to the demand and also a increase in production cost with rising input costs.

    2) When the monetary authority adjusts interest rates to check inflation ,as the interest rates go up cost of borrowing goes up thereby creating a large variety of consumption loads.

    It is very evident with above mentioned reasons inflation starts hurting growth both on the demand as well as supply side. This leads us to conclusion that its a very difficult task to strive to strike a proper balance between inflation control measures and growth momentum as in the case of our country.

    Though inflation is structurally inherent to a developing economy i.e. a developing nation with a billion plus population..more so with a high GDP growth rate of 8%, can it be tamed to acceptable levels??

    This is a question that was at the forefront of parliamentary discussion at the start of this monsoon session.

    So lets check out few factors responsible for inflation and probable remedies of inflation@ Indian Context.

    Causes of Inflation: 1) Demand Pull Factors

    2) Cost Push Factors

    1) Demand Pull Factors : are those factors which are responsible for an increase in the demand for goods and services in general. ex- Rising govt. spending , rising population , rising per capita income , rising Forex reserve etc.

    2) Cost Push Factors : are those factors which are responsible for increase in the costs of production of the distribution of goods and services in general. ex- Infrastructural bottlenecks , rising indirect taxes , Import cost push factor i.e rising international prices of petroleum products etc.

    These causes cannot fully be addressed as few causes are external factors or a price we pay for being a part of Globalized world economy..i.e. rising commodity prices globally cannot be addressed locally.

    Currently in India inflation is caused partially due to supply side constraints and partially due to excess demand. However, supply side bottlenecks are affecting inflation much more than demand factors. For example, a bad crop negatively affected the supply of onions and thus led to a tremendous increase in the prices.

    Though inflation can be tamed to a certain degree by tightening of the monetary policy i.e adopting Hard interest rate policy , qualitative and quantitative measures for specific sectors..this by enlarge is a demand side management provided by tightening of monetary policy.

    With this the govt. should also adopt a prudent fiscal policy to reel down inflationary pressures i.e Lowering of Non Planned govt. spending , Lowering of custom duties etc.

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