Brazil on the Path to a Different Revolution

Brazil on the Path to a Different Revolution

Posted by: on Nov 18, 2015 | No Comments

Brazil was considered to have the sixth largest economy in the world, both by nominal GDP and purchasing power. In 2012, its economy surpassed the United Kingdom, and Forbes ranked the country as being home to the fifth largest number of

Why Inflation is an Agent of Poverty?

Posted by: on Nov 7, 2011 | 10 Comments

India has had high inflation compared to most nations. The inflationary situation has been volatile since the financial year beginning 2010.The inflation in the Indian economy reached as high as 14.86% in April 2010.

Inflation is an agent of poverty. It not only impacts the purchasing power of the lower income group, but also hits the financial capacity of the middle classes. High inflation destroys the wealth of the middle class.

What Causes Inflation in the Economy?

Excess supply of money by the government is the cause of inflation. In an attempt to meet it’s ever rising expenses governments create money – if the production capacity does not keep pace with increase in money supply there is too much money chasing too few goods. Result is inflation. What does the government do with all this money? Mostly it pays itself and during election times it engages in populist policies to buy votes.

How Does Inflation Impact the People?

When the gap between demand and supply is widened, consumers are forced to change their purchasing habits. This can result in manufacturers cutting down production, further adding pressure to the supply side and pushing up the prices; thus creating a vicious cycle. Other ways in which high inflation in an economy affects the people are:

Reduced savings and investment: This is because inflation creates economic uncertainty.
Lesser purchasing options: This is because manufacturers do not have an incentive to spend on new equipment and technology, thus preventing them from creating superior products.
Depreciation in currency: Inflation leads to decline of the trade balance, which puts pressure on the currency- causing it to depreciate and thus makes imports more expensive as well.

What Can Control India’s Inflation?

Posted by: on Oct 27, 2011 | 2 Comments

These days, international news is bombarded with excitement over India’s double-digit growth and speculations about when (and if) the Indian economy will surpass China’s. However, the scene is quite different domestically. In India, the hot topic of debate is the persistent growth in inflation.

(Source: TradingEconomics.com)

Inflation Control: The Basic Steps

Inflation is basically the persistent increase in the general price level. While there are several factors responsible for the growth in inflation, the most significant cause of the inflationary pressure in India is the increase in Aggregate Demand, while the Aggregate Supply is relatively constant. (AD > AS)

The first step in curbing inflation in the country is filling the gap between the Aggregate Demand and the Aggregate Supply. In order to achieve this, either the AS can be increased or the AD can be decreased. However, the latter actually hampers economic development. In order to increase AS, it is imperative to expand the production capacity of all existing units and/or build new production plants.

The rise in prices is also a result of inefficiency in the basic industries and absence of adequate infrastructure. These create a bottleneck in the economic supply, which directly results in higher prices of commodities. For instance, it is much cheaper to transport goods by railways than roadways. Yet, because of the dearth of capacity in Indian railways, businesses have to invest in hiring or buying trucks, which further increases the cost of the final goods produced.

Therefore, the government should focus on building the country’s infrastructure and lowering the economic deficit. There is a need for a comprehensive strategy to improve the supply side economics.

Impact of RBI Policy on Inflation

The Central Bank can influence the economy with the monetary and fiscal policy. The monetary policy helps to manage the supply of money in the economic system, by altering the interest rates. On May 2, 2011, the Reserve Bank of India increased the policy rates by 50 basis points, taking the repo rate to 7.25 percent. Repo rate is the rate at which the Central Bank lends money to other commercial banks in the nation. An increase in the repo rate has made it difficult for companies to raise capital, thus adversely impacting their growth.

While the RBI does play a significant role in controlling inflation, but in a globalized economy there are several external factors that affect the domestic prices. For instance, when Standard and Poor’s downgraded the creating rating of US to AA+ from AAA, the global financial markets crashed on August 5, 2011- impacting the prices of several goods and services indirectly. Certainly, the government and the Central Bank have no control over such matters. Therefore, the only solution is to structure the domestic economy.