Measures to Control Inflation

Inflation and its relation to the economy:

Inflation can be defined as a “price hike of goods and services.” However, an increase in the price rate of one product can’t be called inflation. It is one of today’s global economic scenarios. It should be seen as a challenge, especially after the COVID-19 pandemic, and there has been a consistent effort by economists to bring the economic chain on track, but still, we have not been able to recover much.

Causes of Inflation:

Before understanding the causes of inflation we should first be clear about the primary causes of inflation.

1. Supply and Demand Principle:

• In any economy, the prices of products depend on “Supply and Demand”.
• If there is an excess supply of a product, then the demand for the product falls, due to which the price rate of the product decreases, making goods cheap.
• However, if the Rate of Demand >> Rate of Supply in case of deficiency of supply, there can be a rise in prices observed, which can be called inflation.

2. Rising Prices of Crude Oil in the International Market:

• Increasing prices of crude oil, especially petrol and diesel, are the single biggest factor for inflation in India.
• It takes a toll on other factors such as transportation, edible oil products, etc.

3. Global Pandemic COVID-19:

Due to COVID-19, the availability of products has been reduced.

• During COVID-19 there has been a tectonic change in the product preference of the consumers: e.g. an increment in demand for laptops due to working from home.
• After the lockdown, the supply chains were not able to satisfy the surplus demand of consumers, causing an Inflation.

4. Workers’ crisis:

• After the lockdown when many manufacturing units were re-opened, most of the laborers and daily wage workers had to switch their professions for better income, and this behavior change was observed regarding jobs.
• More people are opting for digitally backed sector jobs as it is immune to the pandemic and now mostly opt for the “Work from Home” scheme.    

5. Environmental crisis and climate change:

• There has been a severe impact on the food production due to unpredictable weather pattern changes such as heavy rainfall, snowfall, and untimely drought, which have caused severe damage to the agriculture economy.
• Brazil is one of the most affected countries in the world in the global food market, followed by India.
• Globally, 30% of crops have been destroyed due to recurring floods.

Positive Side of Inflation:

An inflation rate of 2-4% of the market economy can lead to the healthy growth of the country’s economy, but an excess of it can lead to disastrous effects in the market.

RBI measures to control inflation:

RBI is the Reserve Bank of India. It is the central bank of the Indian economy and is responsible for making the monetary policy of the country. 

• RBI under the instrument of monetary policy decides the repo rate of the banks.
• The final decision on the  rise in repo-rate is made by studying the market.
• Repo-rate is the benchmark interest rate at which the RBI can increase its interest on its loans.

Hence with the increase in repo-rate the bank loan interests increase, which leads to more money flow to the government

Measures to control inflation in India:

The steps taken by the Indian government to tackle the inflation issue are through the fiscal policy, which is decided in the Annual Budget Session of the Parliament.

• In the fiscal policy the government under Direct Benefit Transfer Reduction introduces schemes such as Pradhanmantri Awas Yojana (PAY), Ration Card facility, and Public Distribution(PDS) for those below the poverty line.
• Free healthcare schemes such as Ayushman Bharat. 
• Some monetary support is also given, such as the Pradhanmantri Kisan Samman Nidhi (PM-KISAN), to farmers.

Conclusion:

The continuous rise in prices of goods and services available in the market can be termed inflation in the market. The basic principle behind the rise of inflation is that the rate of demand is greater than the rate of supply. However, if inflation is between 2-4% of the economy, then it is a positive sign of a healthy economy. An increase beyond the given percentage can severely damage an economy.

To control inflation, the RBI uses a Monetary Policy due to which the Repo-Rate is increased. Through fiscal policies such as the introduction of schemes, the government helps reduce inflation.