Cracking Inflation & Its Impacts on the Indian Economy By Mudabbira Rehman

Last year, India’s annual GDP grew from 7.5% to 12.5%, less than in earlier years. However, there are several reasons for this slowed growth due to uncertainty, with COVID-19 being on the forefront. Aside from the unpredictable elements, rising inflation rates are among the major reasons.

What is Inflation?

Inflation is a term used to describe the general rise in the prices of goods and services in an economy. Thus, it is defined as the rate at which the average price of a set of goods rises over a given period of time.

There appears to be no industry sector that is unprotected from the ill effects of inflation. It may affect any service or product, including but not limited to real estate, products, automobiles, cosmetics, pharmaceuticals, and tourism.?

Once inflation becomes a recurring phenomenon, there is no guarantee that it will return to its previous state. Inflation is a grave concern because it curtails the value of the money saved today. Further, inflation systematically erodes the customer's purchasing power.

Impacts of Inflation on Indian Economy

Due to imports being incongruous with exports, India’s current account deficit has grown to USD 44.4 billion from USD 30.7 billion in the previous quarter. With rising commodity prices in India, exports have taken a hit. In contrast, imports have also become more affordable. Therefore, the current account deficit is likely to remain a problem for the Indian economy in the near future.

When inflation occurs, it raises prices for necessities such as food, which can have a negative impact on society. In addition, persistent inflation in an economy can have serious consequences. Excessive inflation can destabilize national economies and lead to financial crises.?

The following are some of the negative consequences of inflation in the Indian economy:

Industrial Sector

In recent years, India has seen a torpidity in industrial growth. However, in FY 2021-22, India’s industrial sector is expected to grow by 11.8 percent. This year was marked by disruptions due to the COVID-19. Aside from the current pandemic, inflation has detrimentally affected the industrial sector.

As prices rise, production factors such as labor and raw materials become more expensive. Companies' profit margins are shrinking. Finally, after a certain extent, the burden of these additional expenses is passed on to the final consumer. As a result, the entire economy suffers.

Final Consumer

The final consumer of goods is the individual most affected by rising inflation. The prices of goods and services are constantly rising. However, consumer wages and income do not increase proportionately—- there is a lag.?

As a result, goods and services become less economical to these final consumers, and the population with the lowest incomes is the most affected. They even fail to afford necessities.

Investments

One of the most significant effects of inflation on an economy is a general slowdown. When this occurs, unemployment rates rise, consumer purchasing power falls, and credit becomes more expensive. All of this puts a strain on the country's entire financial system. It raises concerns about heavy investment in the economy from both domestic and international players.

On the other hand, inflation captivates more inflation and, in some ways, perturbs all market participants. Inflation may not be an umbrella term for all of an economy's ills, yet it is often deemed critical to maintain and drive consumption. The commodity stocks reap financial rewards from rising inflation.?

Gold benefits significantly from rising inflation because it acts as a hedge against it. Aside from gold, commodities such as steel, iron, and copper stocks have the potential to contribute to rising inflation.

The Bottom Line?

The ultimate solution to inflation is to save as much money as possible. This will reduce demand on the economy and, hopefully, reduce it as well. One should learn not to overuse daily necessities (i.e., electricity and LPG gas) or be extravagant when purchasing groceries.

As responsible citizens, we must maintain public properties in order to attract tourists, expand the country's tourism sector, and thus bring additional money into our growing economy. Moreover, when inflation is slowly rising, it is a good time to invest in government-backed investment schemes.

Inflation and consumer equilibrium are inextricably linked. During inflationary periods, commodity prices skyrocket, reducing consumers' purchasing power and causing them to reduce their purchases of goods and services.?

Investing in assets such as commodities, short-term deposits, funds, real estate, and so on will undoubtedly help us gradually achieve our financial goals while protecting our hard-earned money.

(Mudabbira Rehman is a B.A.(Hons.) English student at Jamia Millia Islamia, Delhi, and a member of GAEE JMI, an autonomous branch of the Global Association of Economics Education in India. The views expressed are personal and do not reflect the opinions or views of GAEE or its members.)