Economic Effects Of Inflation In India

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Inflation and its impact in India

What is Inflation

Imagine we had Rs.7 in 2003. One could have purchased a 300 ml Pepsi and gone home happy (excluding the Rs. 2 that shopkeepers charge for refrigerating it).

Fast forward 12 years and on would have to shell out Rs.15 to purchase the same 300ml Pepsi bottle. What happened?

One would think Indra Nooyi has fleeced us, but in reality, the value of money has reduced. This is attributable to inflation.

Inflation is defined as a sustained increase in the general level of prices for goods and services.

Quite literally, the beast of inflation reduces the purchasing power of money.

In recent years, consumer price inflation in India has slowly crept up and reached double digits. The year-on-year
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Inflation of this type is called demand-pull inflation. Various fiscal and monetary measures are adopted to check this inflation.

There is a two-pronged approach towards controlling the economy, namely, the Fiscal Policy and the Monetary Policy.

Fiscal Policy: Fiscal policy is the means by which a government adjusts its spending levels and tax rates to monitor and influence a nation 's economy. The tax and expenditure programs levied and undertaken by the government are the drivers of the fiscal policy. Monetary Policy: The Monetary Policy is governed by the nation 's central bank (in this instance, the RBI) to control the money supply in the economy to maintain price stability and attain high economic growth. The central bank achieves this by controlling the interest rates.

Monetary policy refers to the adoption of suitable policy regarding interest rate and the availability of credit. Monetary policy is another important measure for reducing aggregate demand to control inflation. As an instrument of demand management, monetary policy can work in two ways:
a. It can affect the cost of credit
b. It can influence the credit

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