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.