Why Inflation is of major concern for Indian Economy?
The wholesale food prices in India touched a 10 year high with food inflation coming at 19.95% for the week ended December 5, 2009. This article looks back into the spiraling food inflation in 2009, its implications, reasons and solutions. Significant price increase has been observed in commodities like arhar dal, sugar, potatoes and onions.The key reason cited for the spiraling food price inflation is the bad monsoon in India. There are few other reasons which resulted in boosting of prices such as :
In 2008, it was estimated that India loses INR 58,000 crore worth of agricultural food items due to lack of post harvesting infrastructure such as storage, transportation. Moreover due to hoarding and several other reasons.
Due to spiralling rise in the inflation the real value of money depreciates futrther leading to a reduction in purchasing power. Thus inflation adversely effects the consumers. Due to high prices of essential food products and commodities consumer has to cut down its expenses on non essential items. As GDP consists of consumption as an element in its caculation it depreciates indian GDP.
There are several costs attached to the increasing expected inflation such as:
One cost is the distortion of the inflation tax on the amount of money people hold. Higher inflation rate leads to a higher nominal interest rate, which in turn leads to lower real money balances. If people are to hold lower money balances on average, they must make more frequent trips to the bank to withdraw money—for example, they might withdraw $50 twice a week rather than $100 once a week.The inconvenience of reducing money holding is metaphorically called the shoe leather cost of inflation, because walking to the bank more often causes one's shoes to wear out more quickly.
A second cost of inflation arises because high inflation induces firms to change their posted prices more often. This costs are known as Menu costs.
A third cost of inflation results from the tax laws. Many provisions of the tax code do not take into account the effects of inflation. Inflation can alter individuals' tax liability, often in ways that lawmakers did not intend.
A fourth cost of inflation is the inconvenience of living in a world with a changing price level. Money is the yardstick with which we measure economic transactions. When there is inflation, that yardstick is changing in length.
Inflation is far more pernicious when it is unexpected because it arbitrarily redistributes wealth among individuals and also it effects people's pensions and several other things. So goverment should take serious look on the issues of inflation to have a sustained growth in India.