Inflation

Inflation

Subject: Geography

In news:  There Visible signs of economic rejuvenation and reduced inflation pressures: FM Nirmala Sitharaman

• The inflation is cooling down to 5.78 percent in July, after hovering around the 6.25-6.3 percent-mark in May-June.
• The net market borrowing of the Centre and states is lower than the last fiscal.
• A robust recovery in tax collections has been witnessed over the past couple of months.

Inflation & its causes in current scenario:

• Inflation refers to the rise in the prices of most goods and services of daily or common use, such as food, clothing, housing, recreation, transport, consumer staples, etc.
• Inflation is indicative of the decrease in the purchasing power of a unit of a country’s currency. This could ultimately lead to a deceleration in economic growth.
• However, a moderate level of inflation is required in the economy to ensure that production is promoted.
• Current causes: 
  • Inflation in India is being imported through a combination of high commodity prices and high asset price inflation caused by ultra loose monetary policy followed across the globe.
  • Foreign portfolio investors have directed a portion of the liquidity towards our markets. Compared to a developed capital market such as that of the U.S., India has a relatively low market capitalisation. It, therefore, cannot absorb the enormous capital inflow without asset prices inflating.
  • Additionally, supply chain bottlenecks have contributed to inflation. Essential goods have increased in cost due to scarce supply because of these bottlenecks caused by COVID-19 and its reactionary measures enforced.
  • India’s taxation policy on fuel has made things worse. Rising fuel prices percolate into the economy by increasing costs for transport. Furthermore, the increase in fuel prices will also lead to a rise in wages demanded as the monthly expense of the general public increases. This leads to the dangerous cycle of inflation and depleting growth.