What exactly is meaning of INFLATION in Indian Economy, What could be the possible solutions for curbing it?

Question

Infaltion indicates Economic Mis-Management.

Whenever a product is bought or sold beyond its real price for its worth, then Inflation of money occurs.

One example I can quote for this.

After the MNC's arrival and raising the professional engineers salary beyond 60K per month, the Builders and Banks seems to join hand together to inflate the price of rural lands for building Lifestyle apartments with swimming pools and landscaping.

Since loans are available easily engineers blindly take loans to buy their dream home because they can afford and also home is a basic necessity. Also pride sets in for buying such homes.

Here the true price of land and house is inflated 3 to 5 times and all that extra inflated price goes to the Builders as profit. Here the inflated price amount does not do any real improvement for the geneal economy.

Govt and RBI should evaulate the real price and stop the builders from devouring all the inflated money.

Answer 1

it is impossible to deflate it . inflation could drop if we wake up in the morning and half of india wakes up in usa

Answer 2

In contemporary economic discussion, the word “inflation” usually refers to a general rise in prices. (This use arose from an earlier meaning of an increase in the money supply, which use is still current in some circles.)

The prevailing view in mainstream economics is that inflation is caused by the interaction of the supply of money with output and interest rates.

Governments' paticipation must be there in every possible business activity and environment so that there is a healthy competition between the private and the public enterprises,to keep the inflation under check and control.

Answer 3

Inflation is an increase in the price of a basket of goods and services that is representative of the economy as a whole. In India there are two broad measures of inflation: the Consumer Price Index (CPI) and the Wholesale Price Index (WPI). Of the two the latter has a higher profile because it is measured more frequently, that is, every week. When you read about inflation rising to 7 per cent in the newspaper it's probably referring to the WPI. The WPI is based on the wholesale prices of 435 items ranging from agricultural commodities like wheat, rice, groundnuts etc to manufactured products like steel, cement etc. A single index number is calculated based on those prices and the inflation rate is calculated by comparing the most recent index number with that of a year ago. What causes Inflation on a whole ? >The supply of money goes up. >The supply of other goods goes down. >Demand for money goes down. >Demand for other goods goes up. "in inflation everything gets more valuable except money"

Answer 4

Inflation Definition And Example

Answer 5

hi
inflation means that there is a lot of money power in the hands of the people and as a result there is a huge demand in the market, this demand is more than the supply as aresult there is a shortage of goods. thus prices are increased so as to curb the rising demand.
there are various ways to fix this inflation, nothing that the common man can do, but what economic agencies like the central bank of thecountry in our case( Reserve Bank of India) do are:
1) they increase the difference between the amount of loan actually asked for and what is actually given that means that the people who ask for loan at this time re given an amount less than what they have sked for.
2)then ofcourse they increase their bank rate to stop the outflow of credit (ie loan)to the commercial banks this ultimately leads to the prevention of outflow of credit in the hands of the people.
3)they decrease the cash reserve ratio is increased(the cash reserve ratio is the minimum percentage of the bank's total deposits required to be kept with the central bank) this also controls the outflow of credit.
4)the statutory liquidity ratio( this ia a fixed percentage of assets that every bank must keep in the form of cash) is reduced so that too much money is not available for spending.
5)rationing of credit - in this way credit quotas are fixed for different business activities, financial institutions that lend money cannot exceed this quota limit while granting loans.
all of the above mentioned ways andmethods prevent the excess money flow, thus people reduce their demand, thus prices also return to normal.
hope this helps

Answer 6

Inflation is a general rise in nominal prices. It is usually cause by imbalances between supply of both goods and money.
Lets say you have a simple economy. Every year your economy produces 10 pieces of bread. Let's also say that there are exactly 100 rupees in your economy distributed evenly amongst 10 inhabitants of this economy. Thus, each bread piece will be worth 10 rupees and each inhabitant would buy one bread. If suddenly someone introduces 100 more rupees to your economy, then the price of each bread will be "inflated" to 20 rupees. Why? say inhabitant 1 goes to buy his bread, but now he has 20 rupees, why not buy 2 pieces of bread? So inhabitant 2 sees this and doesn't want to lose his piece of bread so he offers 11 rupees. At this price each can only buy 1 bread, but is left with 9 rupees in savings. Next year, each inhabitant has the 20 rupees plus the 9 rupees saved from the previous year. Inhabitant 1 will try, again to buy 2 pieces, but inhabitant 2 will, again, offer more.... can you see that this game will eventually lead to each paying 20 rupees per piece of bread?

Answer 7

Inflation means there are fewer supply to meet the demand that consumer want. Therefore prices rise as of result this is call inflation. In order to curb inflation, the government change monetary policy. This would help curb the inflation.

Answer 8

The problem lies with the monetary policy. If the money supply is managed so that prices are stable, that will curb inflation. Look at the early 1980s in the US.

Hey, Midas, thanks for the chapter and verse from your textbook. But you didn't answer this poor guy's question.

Answer 9

inflation is olso called excess demand . It is the diff b/w the Aggregate Demand - beyond full employment & AD- Full employ ment. Actually its the prob. of increasing demand in economy of any good when its supply is less

Answer 10

The role of inflation in the economy

In the long run, inflation is generally believed to be a monetary phenomenon, while in the short and medium term, it is influenced by the relative elasticity of wages, prices and interest rates.

[1] The question of whether the short-term effects last long enough to be important is the central topic of debate between monetarist and Keynesian schools. In monetarism, prices and wages adjust quickly enough to make other factors merely marginal behavior on a general trendline. In the Keynesian view, prices and wages adjust at different rates, and these differences have enough effects on real output to be "long term" in the view of people in an economy.

A great deal of economic literature concerns the question of what causes inflation and what effect it has. A small amount of inflation is often viewed as having a positive effect on the economy. One reason for this is that it is difficult to renegotiate some prices, and particularly wages, downwards, so that with generally increasing prices it is easier for relative prices to adjust. Many prices are "sticky downward" and tend to creep upward, so that efforts to attain a zero inflation rate (a constant price level) punish other sectors with falling prices, profits, and employment. Efforts to attain complete price stability can also lead to deflation, which is generally viewed as a negative outcome because of the significant downward adjustments in wages and output that are associated with it.

Inflation is also viewed as a hidden risk pressure that provides an incentive for those with savings to invest them, rather than have the purchasing power of those savings erode through inflation. In investing inflation risks often cause investors to take on more systematic risk, in order to gain returns that will stay ahead of expected inflation. Inflation is also used as an index for cost of living adjustments and as a peg for some bonds. In effect, inflation is the rate at which previous economic transactions are discounted economically.

Inflation also gives central banks room to maneuver, since their primary tool for controlling the money supply and velocity of money is by setting the lowest interest rate in an economy - the discount rate at which banks can borrow from the central bank. Since borrowing at negative interest is generally ineffective, a positive inflation rate gives central bankers "ammunition", as it is sometimes called, to stimulate the economy.

However, in general, inflation rates above the nominal amounts required to give monetary freedom, and investing incentive, are regarded as negative, particularly because in current economic theory, inflation begets further inflationary expectations.

Increasing uncertainty may discourage investment and saving.

Redistribution
It will redistribute income from those on fixed incomes, such as pensioners, and shifts it to those who draw a variable income, for example from wages and profits which may keep pace with inflation.
Similarly it will redistribute wealth from those who lend a fixed amount of money to those who borrow.
For example, where the government is a net debtor, as is usually the case, it will reduce this debt redistributing money towards the government. Thus inflation is sometimes viewed as similar to a hidden tax.


International trade: If the rate of inflation is higher than that abroad, a fixed exchange rate will be undermined through a weakening balance of trade.


Shoe leather costs: Because the value of cash is eroded by inflation, people will tend to hold less cash during times of inflation. This imposes real costs, for example in more frequent trips to the bank. (The term is a humorous reference to the cost of replacing shoe leather worn out when walking to the bank.)

Menu costs: Firms must change their prices more frequently, which imposes costs, for example with restaurants having to reprint menus.

Relative Price Distortions: Firms do not generally synchronize adjustment in prices. If there is higher inflation, firms that do not adjust their prices will have much lower prices relative to firms that do adjust them. This will distort economic decisions, since relative prices will not be reflecting relative scarcity of different goods.

Hyperinflation: if inflation gets totally out of control (in the upward direction), it can grossly interfere with the normal workings of the economy, hurting its ability to supply.
Inflation tax when a government can improve its net financial position by allowing inflation, then this represents a tax on certain holders of currency.

Governments may decide to use this "stealth tax" in order to avoid hard fiscal decisions to cut expenditures, raise taxes, or confront government unions with greater efficiency.

Bracket Creep is related to the inflation tax. By allowing inflation to move upwards, certain sticky aspects of the tax code are met by more and more people. Commonly income tax brackets, where the next dollar of income is taxed at a higher rate than previous dollars.

Governments that allow inflation to "bump" people over these thresholds are, in effect, allowing a tax increase because the same real purchasing power is being taxed at a higher rate.

Corporate Return on Investment is effected by generating inflation. Should a firm increase productivity, this would tend to reduce the prices as per supply/demand ratios. Inflation enables firms to reap the reward from productivity investment instead of benefitting the consumer as happened prior to 1913 in the US.
As noted, some economists see moderate inflation as a benefit; some business executives see mild inflation as "greasing the wheels of commerce."

A very few economists have advocated reducing inflation to zero as a monetary policy goal - particularly in the late 1990s at the end of a long disinflationary period, when the policy seemed within reach.