Inflation - an issue which affects every economy - an issue which all economists across the world ponder upon- an issue which all governments battle against - an issue which makes a huge difference to each and everyone of us, be it a road side hawker or at large scale multi national
corporation.
Inflation means what the word suggests; literally the general prices of all goods and services are inflated. Essentially, inflation refers to a general rise in prices measured against a standard level of purchasing power. In other words, during inflation, the value of money reduces over a period of time. There is a gross demand and supply mismatch - in it would translate to excess money
supply coupled production, high demand. Going solely by economics theory, high growth rate in any economy would naturally induce some inflation; but when unchecked, high pressure is dangerous to the economy.
Normal inflation is a good sign of growth, but high inflation rates - which India faces today has invited a lot of concerns from all sect of people. Often seen as sociopolitical issue, inflation
hurts the poor man the most. India, a country hugely dominated by poor people, will fail majorly if the inflation goes unchecked for a long period of time. Is this high inflation a good sign of growth?
Undoubtedly our economy has put up an outstanding performance with the growth rate being almost 9%. But is it all that matters? Unfortunately NO! With inflation as high as 6.5% the growth has been practically chewed by the inflation! India largely faces the problem of mismanagement by the Government and the Reserve Bank. The moment the inflationary pressure is seen to be rising, the knee-jerk response has been to increase the interest rates in the country! Such a measure is a good short term solution, but needs to be backed by strong long term measures. Today, India boasts of one of the best capital markets in Asia, best IT industries and the most upcoming market for research and development. Are high interest rates justifiable in the long run?
Interest rates work both ways - they can help curb inflation and on the other hand disturb the production as well; thus being paradoxical. They can instead add a burden on the inflation too.
Theoretically, with high supply of money, high interest rates discourage people from borrowing
more, thus reducing the supply of money in the economy. But this can be paradoxical because production of goods will take a hit too as entrepreneurs will not be willing to pay high interest rates! That's situation one. Situation two is when due to high interest rates, people now find fixed deposit investment more attractive as high interest rates will earn more return the stock market. So again, supply of money has increased thus adding a burden on the existing inflationary pressure! Increasing interest rates have a negative effect on all industries across sectors. Priority sectors and small enterprises are adversely affected, thus putting brakes on the production. Today, when India claims to open its economy, promising high growth and attractive markets, high inflation coupled with highest interest rate (almost 13.75%) is a clear signal to all entrepreneurs to stay clear off the sub continent!
Has the government grossly failed to deliver a basic healthy economy by just taking short term measures like this? Are such high interest rates commensurate with the growth of the economy? Are we decelerating our own economy?
corporation.
Inflation means what the word suggests; literally the general prices of all goods and services are inflated. Essentially, inflation refers to a general rise in prices measured against a standard level of purchasing power. In other words, during inflation, the value of money reduces over a period of time. There is a gross demand and supply mismatch - in it would translate to excess money
supply coupled production, high demand. Going solely by economics theory, high growth rate in any economy would naturally induce some inflation; but when unchecked, high pressure is dangerous to the economy.
Normal inflation is a good sign of growth, but high inflation rates - which India faces today has invited a lot of concerns from all sect of people. Often seen as sociopolitical issue, inflation
hurts the poor man the most. India, a country hugely dominated by poor people, will fail majorly if the inflation goes unchecked for a long period of time. Is this high inflation a good sign of growth?
Undoubtedly our economy has put up an outstanding performance with the growth rate being almost 9%. But is it all that matters? Unfortunately NO! With inflation as high as 6.5% the growth has been practically chewed by the inflation! India largely faces the problem of mismanagement by the Government and the Reserve Bank. The moment the inflationary pressure is seen to be rising, the knee-jerk response has been to increase the interest rates in the country! Such a measure is a good short term solution, but needs to be backed by strong long term measures. Today, India boasts of one of the best capital markets in Asia, best IT industries and the most upcoming market for research and development. Are high interest rates justifiable in the long run?
Interest rates work both ways - they can help curb inflation and on the other hand disturb the production as well; thus being paradoxical. They can instead add a burden on the inflation too.
Theoretically, with high supply of money, high interest rates discourage people from borrowing
more, thus reducing the supply of money in the economy. But this can be paradoxical because production of goods will take a hit too as entrepreneurs will not be willing to pay high interest rates! That's situation one. Situation two is when due to high interest rates, people now find fixed deposit investment more attractive as high interest rates will earn more return the stock market. So again, supply of money has increased thus adding a burden on the existing inflationary pressure! Increasing interest rates have a negative effect on all industries across sectors. Priority sectors and small enterprises are adversely affected, thus putting brakes on the production. Today, when India claims to open its economy, promising high growth and attractive markets, high inflation coupled with highest interest rate (almost 13.75%) is a clear signal to all entrepreneurs to stay clear off the sub continent!
Has the government grossly failed to deliver a basic healthy economy by just taking short term measures like this? Are such high interest rates commensurate with the growth of the economy? Are we decelerating our own economy?
