Q. India has experienced a high rate of inflation in recent years. Discuss the major causes of inflation in the Indian economy and evaluate the effectiveness of the measures taken by the government to control it. (250 words)19 Apr, 2023 GS Paper 3 Economy
- Start your introduction with mentioning inflation and its levels in recent years.
- Discuss the causes of Inflation followed by the steps taken by the government to bring down the prices and impact of those steps on inflation.
- Conclude with mentioning some of the suggestive measures.
Inflation is an economic phenomenon that leads to a general increase in the price level of goods and services over time. India has experienced high inflation in recent years, with consumer price inflation (CPI) averaging above 6%. Last year it even crossed 7.5%.
Major causes of inflation in Indian Economy:
- Russia-Ukraine tension: Disruption of two major trade routes viz Russia and Ukraine and sanctions imposed on Russia had majorly impacted the global supply chain. As a result, oil prices surged to record highs, which in turn pushed up inflation. The spill over effect fell upon India as well.
- Higher Food Inflation: Higher food inflation particularly in the prices of cereals crops such as wheat and maize has shot up the inflation level in India. Essentially, higher food and fuel prices made other things costlier.
- Core Inflation: According to a study, the core inflation rate has inched to 6.2% from 6.1% by the end of 2022. Core inflation is the change in the costs of goods and services excluding food and fuel prices.
- Passing on higher input costs to consumers by the firms: Because of this, Core goods inflation continued to inch up year on year while inflation is moderating in the services sector.
Steps taken by the government to control the inflation:
- Increasing repo rate by RBI: Following the hawkish stance, the RBI’s monetary policy committee has time to time raised the repo rates.
- Reduction of import duty on pulses: The government has reduced the import duty on pulses to single digit or has completely removed it to make pulses cheaper in India.
- The government has also taken steps encouraging farmers to sow pulses so that the production of pulses in India increases in the coming sowing season.
- Making edible oil imports tax free: The import of edible oil has been made almost free (tax) for the last three consecutive years so that the supply of edible oil is easy and sufficient.
- Cutting the excise duty of Petro and Diesel: Last year, the government has announced cut on excise duty on petrol and diesel prices to bring the down the goods and logistic prices.
- Limiting the sugar exports: Last year the government has imposed a limitation on sugar exports to maintain adequate stock in the country and to avoid unexpected sugar prices and to reduce dependence on crude oil by increasing ethanol production. This limit has been extended to October 2023.
- Ban on wheat exports: The government banned wheat exports in May 2022 with immediate effect as part of measures to control rising domestic prices.
How effective have these steps been in curbing the Inflation?
As a resultant of above-mentioned measures, the inflation levels have significantly come down:
- The wholesale price inflation declined to a 2-year low of roughly around 4.5 per cent in January on easing prices of manufactured items, fuel and power.
- The retail inflation also slipped to a 16-month low of around 5.5 per cent in March (below the upper tolerance level) as food prices moderated on account of lower vegetable costs.
Inflation in India is caused by a combination of internal and external factors, including rising production costs and consumer demand. While the government has implemented several measures to control inflation, these efforts have proven to be successful to a certain extent. But there’s a lot to be done as implementing structural reforms, agricultural diversification, promoting climate resilient agriculture and reducing dependence on fossil fuels.
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