India’s annual GDP saw a growth rate of approx 6.6% last year. This is actually lower than in the previous few years. Now there are a lot of factors for the slow down in growth. One of them is increasing inflation rates. But did you know that inflation can also have a positive impact on the economy? Let us learn more about the effects and results of inflation on the Indian Economy.
What is Inflation?
Inflation is an economic phenomenon that describes the general increase in the prices of goods and services in the economy. So inflation is the rate at which the average prices of certain selected goods increase in a given time period.
So inflation also indicates the loss of purchasing power of the consumer. The same unit of currency will buy fewer goods and services as their prices increase. This is the loss of purchasing power of the currency of a country.
Effects/ Results of Inflation on Indian Economy
Persistent inflation in an economy can have some very adverse effects. Many problems currently plaguing our economy are results of inflation in our economy. Rapid inflation can disrupt our entire economy can cause a financial crisis in the country. Let us take a look at some of the adverse effects that are results of inflation in the Indian Economy.
Browse more Topics under Money And Money Market
- Introduction to Money
- Measures of Money Supply in India
- Monetary Standards
- Money Market
- Security Related to Money Market
- Classification of Inflation
- Measures to Check Inflation
Balance of Payments
India’s current account deficit is around 17 billion dollars for the last quarter of 2018. This is roughly 2.5% of our GDP. This is because for years now India’s imports are mismatched with their exports. With increasing prices of goods in India, exports have seen a further decline. And the imports have actually become cheaper. So the current account deficit will continue to be a problem for our economy.
India has seen a stagnation in the industrial growth in the last few years. The industrial growth for the month of February 2019 year-on-year was merely 0.1%. This is because inflation has adversely affected the industrial sector as well.
The rising prices mean that the factors of production like labor and raw materials have also become expensive. The profit margins of the companies are decreasing. And after an extent, the companies pass on the burden of these additional expenses to the final consumer. And the entire economy suffers.
The person most affected by rising inflation is the final consumer of goods. The prices of goods and services are constantly rising. But the salaries and income of consumer do not rise proportionately, there is a lag. So the goods and services become less affordable to these final consumers. And the population in the lowest income group are the most affected. They cannot even afford basic necessities.
One of the major results of inflation in an economy is the general slowdown of the economy. When this happens unemployment rates rise, the purchasing power of the consumer decreases, credit becomes expensive. All these cause a strain on the entire financial system of the country. It discourages heavy investment in the economy by both domestic and international players.
Solved Question on Results of Inflation
Q: Can inflation have a positive impact on the economy?
Ans: Yes, in fact, inflation can have a positive impact on the economy. If it is creeping inflation of about 2%, then it promotes economic growth and has an overall positive impact on a nation’s economy. Anything above 3% inflation is generally considered bad.